Stocks closed with losses of more than 1% after investors were spooked by earnings warnings from two major retailers amid persistent concerns regarding the housing market and subprime mortgages.
"Home Depot's cautious comments set the negative tone," said Dan McMahon, head of listed trading at CIBC World Markets. "We also got a lot of headlines about risks for financial stocks, but the markets have been acting well so I think this might be a pause."
The Dow Jones Industrial Average fell 148 points, or 1.1%, closing with the largest decline in more than two weeks. The Nasdaq Composite fell for the first time in six sessions, dropping 1.2%, while the S&P 500 ended a five-session winning streak with a decline of 1.4%.
Home Depot said 2007 earnings will fall 15% to 18%, well below the 9% drop previously forecast. The home-improvement retailer attributed sluggish sales to a weak housing market.
"Last quarter was phenomenal and I think that investors may have raised their expectations a bit too much," said Stewart Schweitzer, global markets strategist at JP Morgan Private Bank. "Even though the official published consensus is for 4 to 5% earnings growth, I think that people are counting on a lot more; my guess is they'll get a little more."
Financial stocks were hit hard on Tuesday, closing down 2.2% after comments from credit rating firm Standard & Poor that it may cut ratings on $12.1 billion of mortgage-related debt. S&P also forecast an 8% drop in U.S. home prices and more mortgages defaults.
Shares of Dow components JP Morgan Chase and American Express were among blue chip index's biggest daily losers. Bear Stearns, at the center of much of the recent concerns regarding mortgage liabilities, closed with a loss of 4%.
Federal Reserve Chairman Ben Bernanke addressed a group of economists regarding inflation but traders said the policymaker's statement shed little new light on the current U.S. economic situation.
"He's been clear and straightforward about what he's concerned about," said Art Hogan, managing director atJefferies & Co.
In other earnings news, retailer Sears Holdings issued guidance below market expectations for its second quarter, as both its Sears and Kmart stores saw same-store sales decline in the past nine weeks.
Meanwhile, the largest U.S. homebuilder, D.R. Horton, forecast a third-quarter loss which sent shares to a new 52-week low on the NYSE.
Investors also kept a close eye on currency markets as the dollar hit a record low against the euro on Tuesday.
Alcoa was the first of the Dow components to kick off earnings season late Monday, and it did little to encourage buying interest. The aluminum company posted a drop in profit that matched analysts' expectations, but quarterly revenue was below the consensus estimate.
Alcoa shares are finding support from news reports indicating that BHP Billiton , the world's biggest miner, was attempting to team up with private equity firms for a potential $40 billion bid for the U.S. aluminum company.
In other market news, the Chicago Mercantile Exchange won shareholder approval to take over its rival the Chicago Board of Trade. The $11.9 billion deal will create the biggest exchange in market value and ends a long bidding war against the Atlanta-based IntercontinentalExchange.
ABN Amro is under investigation from NYSE Euronext for possible insider trading violations related to its takeover bid from the U.K.'s Barclays bank, the Wall Street Journal reported Monday.
European Stocks Slightly Lower
European stocks indexes drifted lower Tuesday, with the retail sector providing some direction in an otherwise tepid trading day.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX were in negative territory.
Shares of baby food maker Royal Numico soared 22.5%, adding to sharp gains at the close Monday, on news yogurt and water maker Groupe Danone bid $16.8 billion for the Dutch company.
Marks & Spencerposted disappointing like-for-like U.K. sales for the first quarter with the weakest growth for nearly two years for the retailer. Shares in the FTSE-100 listed company rose 2.5%, however, as the company did a good job telegraphing the weak numbers to the market.
Asian Stocks Mixed
Asian markets were mixed in the afternoon session Tuesday with South Korea's KOSPI closing at a new record peak. But other Asian stocks fell as investors locked in recent solid gains.
Tokyo's Nikkei 225 Average inched down as a slight rise in the yen encouraged investors to take profits on Sony and other tech stocks that helped drive the market to a seven-year high in the previous session.
Kikkoman tumbled nearly 4% after activist shareholder Steel Partners failed in a court attempt to block the anti-takeover defense of another sauce maker, fuelling speculation the hedge fund would curb its activities in Japan.
South Korean shares rose to a fifth straight record close as SK Telecom surged on a media report it may bid for U.S. firm Sprint Nextel, while LG.Philips LCD gained ahead of its earnings on a broker's upgrade.
China's Shanghai Composite Index was lower by 0.8% amid worries about rising stock supplies with large banks making gains, bolstered by expectations of strong first-half profit. But worries about the supply of additional shares to the market continue to undermine investor confidence, with state media reporting that several companies, including China Railway Engineering Group, China Postal Bank and Beijing Bank, were preparing to launch initial public offerings.
Hong Kong stocks hit their sixth straight record high with China plays jumping over 1% as mainland lenders advanced on robust earnings guidance from ICBC and China Merchants Bank.