Stocks snapped their four-day winning streak Wednesday after the Fed’s latest "beige book" report pointed to a sluggish recovery and earnings from Boeing disappointed.
The Dow Jones Industrial Average fell 39.81, or 0.4 percent, to close at 10,497.88, after logging four straight gains.
The S&P 500shed 0.7 percent but finished above the key 1,100 mark. The Nasdaq lost over 1 percent. The CBOE volatility index, widely considered the best gauge of fear in the market, was above 24 at the closing bell.
“We’re going to run into some headwinds here and we’ll see a bit of a pullback, which is good, and people can get back in on that pullback,” said Matt Cheslock, senior specialist at Cohen Capital Group. “People are going to protect profits going into the summer, and that’s the wise thing to do.”
Boeing was the biggest drag on the Dow, down 1.9 percent, after the aerospace giant reported its profit fell in the latest quarter amid lower commercial-plane deliveries and defense revenue and higher taxes. The company also issued a disappointing outlook.
Alcoa declined 1.5 percent a day after Fitch gave Alcoa's latest debt offering an investment-grade rating but said it's keeping its "negative" outlook for the company amid pressure on the aluminum market.
Meanwhile, Verizon and Caterpillar were among the Dow's gainers.
Health care was the weakest of 10 key S&P sectors as guidance out of the sector this earnings season hasn't been very clear.
Aetna reported a decline in revenue and employer-based membership on Tuesday. Aetna also said it awarded a 12-year contractto CVS Caremark to handle pharmacy-benefit-management services for almost 10 million members.
Techs and financials were also weak, while telecoms gained.
Financials declined after Moody's lowered its outlookon Bank of America , Citigroup and Wells Fargo to "negative" from "stable," citing lower government support for financial institutions with new regulations. The negative outlook increases the chances of the companies' credit ratings being downgraded over the next 12 to 18 months.
The Fed's latest "beige book" report, named for the color of its cover, indicated that while economic activity in some areas of the country increased, a few districts still saw some signs of softening.
"Among those districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two districts, Atlanta and Chicago, said the pace of economic activity had slowed recently,'' the Fed said.
Last week, Fed Chairman Ben Bernanke called future growth "uncertain," which led to a selloff in stocks and worried investors who look to Bernanke for reassurances that a rebound is underway.
Earlier reports showed investor confidence among the wealthiest investors fell to its lowest level in nearly a year, durable-goods orders unexpectedly fell 1 percentin June and mortgage applications fell 4.4 percent last week.
The latest batch of earnings was a mixed bag.
Sprint Nextel reported a wider first-quarter loss but saw fewer bill-paying customers leave the company.
Comcast reported its profit fell nearly 9 percent amid charges from its pending acquisition of CNBC parent NBC Universal from GE , but revenue rose amid an improvement in advertising and demand for premium-television services like pay-per-view and digital-television packages.
Broadcom shares rose after the company beat on both earnings and revenueamid strong demand for its chips, which are used in everything from mobile phones to broadband equipment. In addition, at least four brokerages raised their price targets on the chipmaker.
And ConocoPhillipsbeat earnings expectationsand said it's selling its stake in Lukoil.
With nearly half of the S&P 500 reporting earnings, 77 percent have beat expectations, according to Thomson Reuters.
A day after BP announced a leadership change, and 100 days after the Gulf oil spill, the SEC is investigating possible insider tradingin shares of BP .
Meanwhile, a team of federal investigators known as the "BP Squad" is investigating whether cozy relations between federal regulators and BP, Transocean and Halliburton contributed to the Gulf oil spill, the Washington Post reported.
Oil prices fell to $76.99 a barrelafter a report showed a big rise in crude-oil inventories. Gold prices rose to $1,160.40 an ounce, steadying after hitting three-month lows on Tuesday.
Going forward, gold may be a good place for investors to put their money, Cheslock said.
Demand for the Treasury's 5-year auction smashed expectations, even though it was expected to be the weakest of all the government's debt sales this month. The high yield was 1.796 percent and the bid-to-cover ratio was 3.06.
The 7-year auction is slated for Thursday.
Shares of Research In Motion jumped more than 4 percent amid buzz about a new touch-screen BlackBerryto compete with the likes of Apple's iPhone and other smartphones.
Meanwhile, search-engine giant Google is in talks with various game companies to develop a rival for social-networking site Facebook, the Wall Street Journal reported.
Standard & Poor's said it may cut AT&T's credit rating by one notch, saying that the wireless provider could have difficulty reducing its debt load within a reasonable timeframe.
Nelson Peltz's Trian Group has taken a big stake in Family Dollaraccording to a regulatory filing.
AstraZeneca, ExxonMobil, Royal Dutch Shell, Kellogg, Motorola and Amgen are expected to report earnings on Thursday.
Volume was light with about 1 billion shares changing hands on the New York Stock Exchange. Decliners outpaced advancers, roughly 2 to 1.
Still to Come:
WEDNESDAY: Earnings from Visa after the bell
THURSDAY: Weekly jobless claims; 7-yr note auction; Microsoft analyst meeting; Earnings from: AstraZeneca, ExxonMobil, Royal Dutch Shell, Kellogg, Motorola and Amgen
FRIDAY: First release of 2Q GDP; employment cost index; Chicago PMI; consumer sentiment; Earnings from: Chevron and Merck
More From CNBC.com: