U.S. stocks erased earlier gains to close lower Wednesday after the Federal Reserve released the minutes from its March meeting.
The Dow Jones industrial average closed about 40 points lower, with Goldman Sachs contributing the most losses. The 30-stock index had traded nearly 200 points higher earlier in the session.
The S&P 500 dropped 0.3 percent, with financials lagging. The Nasdaq composite slipped 0.6 percent after hitting a new all-time high earlier in the session.
The Dow and S&P also posted their biggest one-day reversal since February 2016.
The minutes showed Fed officials want to start unwinding the central bank's massive $4.5 trillion balance sheet later this year.
"I think the biggest surprise is the amount of optionality they included," said Matt Toms, chief investment officer of fixed income at Voya Investment Management. "They said they could be a more active Fed, which means the short end of the curve could be biased higher."
"On the balance sheet, they're talking about addressing both the mortgage and Treasury components. The market had expected them to address the mortgage component," he said.
Dow intraday chart
Unwinding the balance sheet is significant both because of its sheer size and the impact it could have on markets, as Fed members including Chair Janet Yellen have indicated that the move itself would amount to a rate hike.
"At some point, they have to lower it, but I don't think we'll ever see it back below $1 trillion," said Myles Clouston, senior director at Nasdaq Advisory Services. He also noted that some Fed officials had hinted earlier at lowering the balance sheet, "so this shouldn't be a surprise for investors."
The minutes also showed the central bank was concerned the stock market may be overvalued.
Investors also digested remarks from House Speaker Paul Ryan, in which he said that tax reform will take longer to accomplish than repealing and replacing Obamacare would.
"Right now, you have two pieces of news that shouldn't really surprise us but bringing down the market," said Art Hogan, chief market strategist at Wunderlich Securities. "Literally every Fed speaker has been talking about lowering the balance sheet."
The possibility of tax reform has been one of the main drivers in the stock market's massive postelection rally, along with deregulation and infrastructure spending.
"On the tax reform side, ... it's going to be difficult, no question," said Eric Stein, co-director of global income at Eaton Vance. "But financial markets should be forward looking mechanisms, so if something takes longer to happen, it shouldn't mean you" completely change your investment strategy.
The U.S. 10-year note yield traded lower, near 2.333 percent, after hitting 2.38 percent earlier in the session.
On the data front, private payrolls rose by 263,000 last month, well above a consensus estimate of 185,000. The February number was revised significantly lower, however, from the originally reported 298,000.
"The ADP report really seemed to contradict some of the negative bias in the market," said Eric Wiegand, senior portfolio manager at the Private Client Reserve at U.S. Bank. He noted some market participants were worried that last month's weather could have had an adverse impact on hiring.
The report serves as a preamble for the Bureau of Labor Statistics' monthly employment report, which will be released Friday at 8:30 a.m. ET.
"We're probably going to get a much better-than-expected nonfarm payrolls report on Friday," said Randy Frederick, vice president of trading and derivatives at Charles Schwab. The U.S. economy is expected to have added around 180,000 jobs in March, according to a Reuters estimate.
Other data released Wednesday the Institute for Supply Management non-manufacturing index which came in at 55.2, below an expected read if 57.
The dollar fell 0.1 percent against a basket of major currencies, with the euro near $1.067 and the yen around 110.6.
In corporate news, JAB announced Wednesday it will buy Panera bread for $315 per share, or around $7.5 billion. The announcement sent Panera's stock flying more than 14 percent higher.
Overseas, European equities traded mostly higher while Asian equities also rose as investors turned their eyes to President Donald Trump's meeting with Chinese President Xi Jinping.
Schwab's Frederick said the two-day meeting in Mar-a-Lago will be "the wildcard" this week. He said he expects the meeting to go well, noting Trump has been cordial with other world leaders that have visited the country recently.
"It would surprise me very much if he acts though in person [with Xi]. He doesn't seem like he does that," Frederick said.
The Dow Jones industrial average fell 41.09 points, or 0.2 percent, to close at 20,648.15, with JPMorgan Chase leading decliners and McDonald's the top advancer.
The S&P 500 slipped 7.31 points, or 0.31 percent, to end at 2,352.95, with financials leading nine sectors lower and utilities and real estate outperforming.
The Nasdaq dropped 34.13 points, or 0.58 percent, to close at 5,964.48.
About two stocks declined for every
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.85.
—CNBC's Jeff Cox and Reuters contributed to this report.
Correction: Naeem Aslam works at Think Markets. A previous version misstated the firm's name.
On tap this week:
2:00 p.m. Fed minutes
8:30 a.m. Jobless claims
8:30 a.m. Employment report
10:00 a.m. Wholesale trade
12:15 p.m. New York Fed's Dudley speaks on financial regulation
3:00 p.m. Consumer credit