Stocks fell on Tuesday, led lower by sharp declines in tech, after comments from top Federal Reserve officials cooled investor optimism around a potential rate cut next month.
The Dow Jones Industrial Average closed 179.32 points lower, notching its biggest one-day loss since May 31, at 26,548.22. The lost 0.95% to end the day at 2,917.38. The Nasdaq Composite dropped 1.5% to 7,884.72.
The S&P 500 tech sector dropped 1.8% as Microsoft shares lost more than 3%. Microsoft dropped after an analyst at Jefferies raised worries over the company's cloud service, Azure, and its success relative to rival Amazon Web Services. Adobe, Autodesk and Lam Research also closed down at least 3%.
Fed Chair Jerome Powell said the central bank is assessing whether current economic uncertainties call for lower rates. Powell noted the Fed will take a wait-and-see approach given how rapid recent economic changes have been. The central bank also believes U.S. inflation will return to 2%, albeit at a slower pace than expected, Powell added. He also said the Fed remains independent of "short-term political interests."
James Bullard, president of the St. Louis Fed, poured cold water over the idea of a half-point rate cut prior to Powell's remarks.
"Just sitting here today I think 50 basis points would be overdone," Bullard, the only FOMC member to dissent on the Fed's decision last week to keep rates unchanged, told Bloomberg TV. "I don't think the situation really calls for that but I would be willing to go to 25 ... I hate to pre-judge meetings – things can change by the time you get there – but if I was just going today that's what I would do."
Market expectations for a July rate cut are at 100%, according to the CME Group's FedWatch tool, since last week's Fed meeting. The Fed said it will act "as appropriate" to maintain U.S. economic growth. That comment stoked optimism around a potential rate cut in July.
Bullard and Powell's comments added to the session's negative sentiment, which was sparked by the weakest consumer confidence reading in more than 1½ years.
The Conference Board said its consumer confidence index fell to 121.5, hitting its lowest level since September 2017. Economists polled by Refinitiv expected the index to slip to 131.1. The Conference Board pointed to escalating trade tensions as the culprit for the loss of confidence.
"Bond markets appear to be signaling an economic slowdown, while equities suggest growth will continue in a low inflation Goldilocks scenario," said Mark Haefele, global chief investment officer at UBS Global Wealth Management. "Both stories only make sense if we conclude bond markets are focused on a pre-emptive Fed strike to forestall the risk of a recession, while equities are telling us that the Fed will be successful."
Investors are also awaiting a meeting between President Donald Trump and Chinese President Xi Jinping later this week. The meeting between Trump and Xi will be the first face-to-face meeting for the leaders since trade talks broke down in May, leading to a hike in U.S. tariffs on imports of Chinese goods.
Bloomberg reported that U.S. officials sought to lower expectations for the meeting by insisting the U.S. would not change its stance on China implementing significant economic reforms.
"Hopefully there will be some leaks during the days leading up to the bilateral meeting indicating that some progress has been made at the staff level," Tom Block, Washington policy strategist at Fundstrat Global Advisors, wrote in a note. "However any announcements will depend on success at the two-party summit."
"There is always uncertainty with President Trump as he views his unpredictability as a key asset," Block added. "From the last-minute change in bombing Iran to the unexpected announcement of tariffs on all Mexican imports, President Trump has made the Art Of the Deal into Policy Making by Surprise."
Washington and Beijing have imposed tariffs on billions of dollars' worth of one another's goods since the start of 2018, battering financial markets and souring business and consumer sentiment.
In corporate news, AbbVie agreed to buy Botox-maker Allergan for $63 billion in cash and stock. The announcement sent Allergan soaring 25.4%. AbbVie shares slid 16.3%.
—CNBC's Sam Meredith and Michael Sheetz contributed to this report.
Clarification: This article has been updated to reflect that the Dow closed 179.32 points lower.