Stocks followed commodities sharply lower throughout Tuesday's session as oil slid and investors reacted to disappointing sales results from Alcoa.
The Dow Jones Industrial Average fell 117.53 points, or 0.95 percent, to close at 12,263.58.
Alcoa, Chevron and ExxonMobil led the Dow lower all day, while Wal-Mart and Proctor & Gamble gained.
The S&P 500 dropped 10.30 points, or 0.78 percent, to close at 1,314.16, while the Nasdaq Nasdaq Composite, 26.72 points, or 0.96 percent, to close at 2,744.79.
The CBOE Volatility Index, widely considered the best gauge of fear in the market, rose above 17.
Most key S&P 500 sectors declined, led by energy and materials.
Oil prices tumbled after Goldman said the oil market will experience a "substantial pullback" to $105 a barrel for London Brent crude, which had traded above $126 a barrel last week. London Brent crude fell more than 2 percent, to just below $121 a barrel, while U.S. light crude fell more than 3 percent, to just above $106 a barrel.
"We continue to believe that—even with the loss of Libyan production—the oil market has adequate inventory and OPEC spare production capacity to avoid the degree of physical tightness experienced in 2008 well into next year," Goldman said in a note to clients.
Goldman's decision to also book profits on metals, including gold, silver, copper and platinum, sent prices of these commodities falling as well. Gold closed nearly 1 percent lower at $1,452.90 an ounce. The dollar, meanwhile, continued to slump against a basket of currencies.
"I think we’re peaking out on commodity prices," says Jim Paulsen, chief investment strategist at Wells Capital Management, who said tightening policies in emerging markets like China are succeeding in slowing growth. "You’ll see U.S. and global growth slow a bit, which takes the upward trend out of commodities markets."
Oil drillers, suppliers and producers pushed energy stocks lower, led by Nabors Industries, Anadarko Petroleum and Chesapeake Energy .
Airlines, on the other hand, including Delta , United Continental and JetBlue were buoyed by falling oil prices. The sector has suffered for most of this year as operators struggled to offset higher jet-fuel costs by raising fares and cutting capacities. (Read More: Buy & Sell These Airlines Amid Rising Oil)
Alcoa led materials lower after the aluminum maker missed forecasts on revenue. Meanwhile, UBS raised its price target on the firm to $19.50 from $18. Cliff's Natural Resources and Freeport McMoran Copper & Gold also slumped.
Meanwhile, Chevron declined even after the oil giant said it expects better earnings in the first quarterthan in the previous quarter.
JPMorgan Chase , Bank of America and Google are scheduled to report earnings throughout the week.
Cisco traded flat after news the networking company will overhaul its consumer products divisionand cut 550 jobs. Critics have targeted the division, saying the networking giant has strayed from its core business. Last week, CEO John Chambers admittedCisco had lost its way.
Among other techs, Nokia slumped after Morgan Stanley downgraded to "underweight" from "equal-weight." Alcatel-Lucent rose, but Ericsson slipped even after Morgan Stanley upgraded the firms to "overweight" from "equal-weight" and "equal-weight" from "underweight," respectively.
Meanwhile, Apple rose after Jefferies said the iPod maker might be launching a new video-focused cloud-based service. The firm also reiterated their "buy" rating on the stock. According to rumors, the new iTV-like device could rival firms such as Netflix . Apple shares have been on a decline since April 6.
And Level3 Communications fell a day after news the communication firm planned to buy Global Crossing for $23.04 a share in a tax-free, stock-for-stock sale. UBS upgraded Level3 on the news to "neutral" from "sell."
Tibco Software advanced almost 5 percent after Hewlett-Packard considered buying the business software maker, according to sources.
Procter & Gamble gained slightly after the consumer products giant said it will raise its dividend by 9 percent.
Wal-Mart rose after news higher-income shoppers are returning to Wal-Mart's eastern stores.
Volume on the consolidated tape of the New York Stock Exchange was 4.2 billion shares, while about 950 million shares changed hands on the NYSE floor.
Treasury prices held gainsafter the government auctioned $32 billion of 3-year notes, which had a high yield of 1.280 percent and bid-to-cover of 3.25.
In economic news, the government reported import prices rose in March, and the trade deficit fell. Import prices rose 2.7 percent in March from a 1.4 percent gain in February thanks to higher oil and food prices, the Labor Department said Tuesday.
But Paulsen at Wells Capital Management points out that the trade deficit lags changes in currencies by 18-to-36 months, and that the current deficit reflects a period (summer 2008 to March 2009) when the dollar was strong.
"It takes awhile to change the direction of the trade boat," Paulsen said.
With the dollar weaker now for nearly two years, Paulsen expects the trade deficit will begin to fall significantly, which should give a boost to gross domestic product this quarter or next.
"I can see where we go from '1-something' in the first quarter to '5-something' in the third," Paulsen said, referring to GDP. "I do think that’s what this sets up."
Small business optimism fell in March, according to the National Federation of Independent Business' overall optimism index. Although more owners raised prices, many expect economic activity to slow in the next six months.
And the U.S. reported a monthly budget deficit of $188 billion in March as the government spent more than twice what it took in the last month, according to the Treasury Department. The figure was just shy of the $189 billion forecast of economists polled by Reuters.
European shares suffered their biggest one-day decline in a month after Japan's worsening nuclear crisis sparked a bout of profit taking.
On Tap This Week:
WEDNESDAY: Weekly mortgage applications, retail sales, business inventories, oil inventories, 10-year Treasury note auction, Beige Book, United Technologies shareholder meeting; earnings from JPMorgan before-the-bell.
THURSDAY: Weekly jobless claims, PPI, 30-year Treasury bond auction, Kocherlakota speaks, Plosser speaks, Lacker speaks, Nestle shareholder meeting; earnings from Hasbro before-the-bell and Google after-the-bell.
FRIDAY: CPI, Empire state manufacturing survey, Treasury international capital, industrial production, consumer sentiment, credit card default rates reported; Evans speaks, Hoenig speaks, G24/International Monetary Affairs meeting; Earnings from Bank of America and Mattel before-the-bell.
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