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Stocks tumbled on Thursday, with the Dow and S&P 500 posting their first monthly drop since January, as investors worried about Europe's economy, an Argentine default and a jump in U.S. labor costs prompted concerns about corporate margins.
"It's a combination of the ECI (Employment Cost Index) coming in hot, as well as the Argentinian situation, which we do not think is a contagion situation, but the straw that broke the camel's back," said Jim Russell, senior equity strategist for US Bank Wealth management.
"The market has been extremely resilient over the course of Ukraine, Iraq and now Israel; to pile on a bad macro number and a default is asking too much," said Russell.
Argentina's default came as international banks sought a deal that would let the country restart servicing its securities. Argentinian stocks traded in the U.S. were hit, including Pampa Energy.
"We're a worldwide economy, so the credit of one country effects other countries, and a lot of the bond holders were U.S. based," said JJ Kinahan, chief strategist at TD Ameritrade.
The Labor Department reported U.S. labor costs rose the most in more than five years in the second quarter, with the ECI climbing 0.7 percent, the biggest jump since the third quarter of 2008.
"Maybe wages are growing a little faster than the Fed and others anticipate; if you see inflation a little stronger, and wages a little stronger, that might put pressure on margins. But with margins at record levels, if wages grow faster than people think, demand will too," said Bob Baur, chief global economist at Principal Global Investors.
Read MoreUS labor costs jump
"Europe is struggling to keep its head above water economically, and for the first time, there is the possibility Fed may have to shift from offense to defense," said Bruce Bittles chief investment strategist at RW Baird & Co.
"I think it's just a function of we had a terrific rally, and there are some things breaking down under the hood," said Dan Greenhaus, chief global strategist at BTIG LLC. (Quiz: think you know markets? Prove it)
"The good news is getting lost in the shuffle, and for the time will take a back seat to weakness in European markets on deflationary fears," said Art Hogan, chief market strategist at Wunderlich Securities.
Euro-zone inflation unexpectedly declined this month, highlighting the European Central Bank's worries that the region's economy is not healthy enough to support increased prices.
Hitting its highest level since April, the CBOE Volatility Index, a gauge of investor uncertainty, jumped 27 percent to 16.95.
The lost 39.40 points, or 2 percent, to 1,930.67, with energy and telecommunications leading declines that included all 10 of its main sectors.
The fact that all 10 S&P 500 sectors are in decline "tells you there is no one thing. It's a broad-based sell off, and we've been hearing the end is near forever," said Kinahan.
The Nasdaq shed 93.13 points, or 2.1 percent, to 4,369.77.
For every share rising, nine fell on the New York Stock Exchange, where nearly 927 million shares traded. Composite volume neared 4.3 billion.
A report Thursday had the pace of business activity in the Midwest in July dropping to its slowest pace since June 2013.
Market strategists offered differing views on whether a Fed move towards a normalization in monetary policy in the earlier part of 2015 rather than the middle part of the year was a positive or negative for U.S. equities.
Bittles voiced the view of the latter camp, saying that "for the past five years, Fed support has been the driving force behind higher stock prices."
Domestic data had weekly jobless claims coming in just above expectations, but the four-week moving average still put a positive spin on the labor market.
"It's pretty hard for the Fed to ignore a growing and stronger economy," said Bittles, citing data on Wednesday that had the U.S. economy growing 4 percent in the second quarter.
On Wednesday, stocks wavered after better-than-expected economic growth in the second quarter and a decision by the Federal Reserve to continue tapering.
—By CNBC's Kate Gibson
Coming Up This Week:
Earnings: Procter and Gamble, Chevron, CBOE, Axa, Calpine, Clorox, ArcelorMittal, Weyerhaeuser
Monthly vehicle sales
8:30 a.m. Employment report
8:30 a.m. Personal income and spending
9:55 a.m. Consumer sentiment
10:00 a.m. ISM Manufacturing
10:00 a.m. Construction spending
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