Stocks roar back from 500-point loss in the Dow, but still end the day lower

Stocks fell on Tuesday as corporate results from Caterpillar and 3M disappointed investors, but the market managed to recover most of its losses later in the session as investors rotated into McDonald's and defensive stocks like Procter & Gamble.

The Dow Jones Industrial Average closed 125.98 points lower at 25,191.43 while the S&P 500 fell 0.55 percent to 2,740.69. The Nasdaq Composite, meanwhile, closed 0.4 percent lower at 7,437.54. The small-caps Russell 2000 dropped 0.8 percent and turned negative for the year.

At its session lows, the Dow had fallen 548.62 points, while the S&P 500 and Nasdaq had lost more than 2 percent each. The comeback was led by McDonald's, which rose more than 6 percent on strong earnings, and a 0.65 percent gain in Procter & Gamble. Coca-Cola also rose 0.85 percent while the S&P 500 consumer staples sector climbed 0.4 percent.

"We broke below that 2,700 level on the S&P 500 and buyers came out of the woodworks," said Jeff Kilburg, CEO of KKM Financial. "I think people were waiting for this and are now more comfortable" buying at these levels. But while he finds the move to be impressive, Kilburg said there will be more volatility moving forward.

The S&P 500 posted its fifth straight decline and briefly dipped below the lows hit earlier in October during this ongoing sell-off. The major indexes are all down at least 4.7 percent for October.

Tuesday's initial sell-off picked up steam after Caterpillar and 3M released their latest quarterly results, disappointing Wall Street.

Caterpillar dropped more than 10 percent following the release of its results before closing 7.5 percent lower. The company said its manufacturing costs rose due to higher material and freight costs. Material costs were driven by higher steel prices and tariffs. This drop adds to Caterpillar's steep monthly losses. Through Tuesday's close, the stock is down 21.9 percent for the month.

The U.S. and China have implemented tariffs on billions of dollars worth of their goods this year, increasing costs for companies and raising fears that tighter global trade conditions could slow down the global economy. Negotiations between the two countries have stalled recently, increasing fears that this spat will be prolonged.

"We just look like we're getting further away from a deal with China," said Art Hogan, chief market strategist at B. Riley FBR. "The ramifications of a prolonged trade war are really seeping into investors' minds right now."

"I think we're coming to a capitulation point," he said.

Shares of 3M fell as much as 8.4 percent before finishing nearly 4.4 percent lower. Its quarterly earnings and revenue missed expectations. The company also trimmed its earnings outlook for 2018.

The latest bout of selling comes during the busiest week of the earnings season, with more than 150 members of the S&P 500 set to report. Of the companies that have reported thus far, 79.6 percent have topped analyst estimates for earnings, according to FactSet.

"US corporate earnings season has started with more of a whimper than a bang," said Nick Colas, co-founder of DataTrek Research, in a note. "Yes, companies are beating expectations, but by less than usual."

"This week has the chance to turn things around with 32% of the S&P 500 reporting. Still, it is now clear that we are past peak earnings momentum," Colas added.

—CNBC's John Melloy and Ryan Browne contribute to this report.

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