Stocks ended lower as investors took a pause after stocks reached two-year highs, and the dollar rose as concerns over European sovereign debt worries resurfaced.
The Dow Jones Industrial Average fell 19.07 points, or 0.2 percent, to close at 11,457.47 after reaching a two-year highon Tuesday.
Alcoa , JPMorgan and General Electric declined. Coca-Cola , Caterpillar , and Microsoftrose.
The S&P 500 fell 6.36 points, or 0.5 percent, to close at 1,235.23 and the Nasdaq fell 10.50 points, or 0.4 percent, to close at 2,617.22. The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose to nearly 18.
Most of the key S&P 500 sectors were trading lower, led by utilities, financials and materials, while consumer staples gained.
Wednesday's economic news, indicating little inflation, and increased capacity utilization (a measure of how firms are using their resources), among other positive signs, are "baby steps," Jack Ablin, CIO at Harris Private Bank, told CNBC.com.
"We’re making incremental headway, but certainly not trailblazing," Ablin said. "Call it a slow but steady recovery."
Ablin expects the market will continue to move higher, but his forecasts for next year are more down-to-earth than some of his Wall Street counterparts. Ablin said the S&P 500 is likely to realize a total return, including dividends, of about 7.5 percent.
Where Ablin differs from the Street is in profit margin forecasts, as he does not believe corporations can expand margins as much as Wall Street seems to think.
Costs for the "sources of production," which Ablin defines as labor, commodities, and capital, are all trending higher, he said, adding: "Unless they can pass these costs along, I don’t see how margins can expand."
European stocks closed lower, snapping their longest winning streak in six months, after Moody's gloomy outlook on Spain. Moody’s stressed, however, that it did not expect Spain to have to resort to a bailout from the European Union like Greece and Ireland.
European bank stocks, which are usually the most sensitive to economic changes, were the biggest laggards following the news.
The dollar rose against a basket of currenciesas the euro fell. Gold, meanwhile, slipped to about $1,385.
Among U.S. financials, Morgan Stanley slipped after Goldman Sachs cut its EPS view for the investment bank to 35 cents a share from 55 cents. Nomura also cut Morgan Stanley's earnings estimate to 30 cents a share from 40.
Meanwhile, Goldman Sachs slid after Nomura cut its earnings estimate on the firm to $3.75 a share from $4.25 a share. (Read More: 'Fast Money Traders'—Hidden Weakness in Financials?)
Other major banks were trading in the red including Barclays and Citigroup .
Goldman also raised its ratings for U.S. asset managers to "attractive," boosting price targets for the sector by about 19 percent on average. Specifically, Goldman raised T. Rowe Price to "buy" from "neutral," and added it to its "conviction buy" list. Goldman also raised Janus Capital to "neutral" from "sell," but cut its rating for Eaton Vance to "sell" from "neutral."
Goldman raised Jefferies' EPS to 29 cents a share from 25.
And Wells Fargourged regulatorsto demand mortgage lenders hold more of the loans they originate on their books, instead of selling them on, according to a report in the Financial Times.
On the tech front, Microsoft rose after Jefferies raised its estimates for the tech giant to be in line with consensus views, based on the popularity of the tech giant's Kinect platform for the Xbox 360.
A handful of tech stocks are slated to report earnings on Thursday including Oracle, ResearchIn Motion and Take-Two.
Other major firms expected to report are Discover Financial, FedEx and General Mills.
Shares of Joy Global jumped more than 7 percent after the mining equipment maker posted better-than-expected quarterly results and also boosted its forecast for 2011.
Honeywell slipped after the diversified manufacturing company gave disappointing earnings guidance for 2011, in part because of pension costs. Honeywell's earnings were expected to be between $3.50 a share to $3.70 a share on revenues of $35 to billion to $36 billion.
Best Buy declined for a second day after Oppenheimer downgraded the electronics retailer to "perform" from "outperform." On Tuesday Best Buy reported disappointing earningsas sales of flat TV screens and other electronics slowed.
McDonald's said it would double the number of its restaurants in Chinato 2,000 by 2013, to take advantage of the rapid growth in the country.
Whole Foods gained after Bank of America Merrill Lynch resumed coverage of the upscale grocer at a "buy" rating, citing attractive valuation for the shares and "broadened growth prospects."
In M&A news, Dynegy climbed afterCarl Icahn said he had agreed to buy the energy companyfor $665 million in cash. Dynegy shareholders rejected a bid by the Blackstone Group three weeks ago. Oil advanced above $88 a barrelfollowing a unexpectedly very large drop in U.S. crude oil inventories.
Novartis shares jumped more than 5 percent after the Swiss pharmaceutical company said it was getting closer to buying the remaining shares of eye care company Alcon that it doesn't already own.
Among IPOs, Gain Capital fell after the online foreign exchange portal debuted at $9, which was below its expected offering price of $13 to $15 a share.