The 30-stock Dow slid 222.19 points, or 0.8%, to close at 27,463.19. Caterpillar and Boeing were the biggest laggards in the Dow, falling 3.2% and 3.5%, respectively. The S&P 500 pulled back by 0.3% to end the day at 3,390.68, marking its first close below 3,400 since Oct. 6. The Nasdaq Composite bucked the negative trend, rising 0.6% to 11,431.35 as tech shares gained broadly.
Traders increased positions in names that benefit from people staying at home and trimmed holdings in stocks dependent on the economy reopening. Online retailers Shopify and Amazon rose 4.3% and 2.5%, respectively. Zoom Video gained 4.1%. Microsoft advanced 1.5%. Meanwhile, American Airlines dropped 4.8% while United and Delta both slid more than 3%.
"Growth/momentum stocks are having a solid session as investors grow a bit more somber on the near-term macro outlook," Adam Crisafulli, founder of Vital Knowledge, wrote in a note.
A CNBC analysis of data from Johns Hopkins University showed daily U.S. coronavirus cases have risen by an average of 69,967 over the past week, a record. The average number of Covid-19 hospitalizations has also risen by at least 5% in 36 states over the past seven days, according to data from the Covid Tracking Project.
Wall Street was coming off a tough session, with the Dow posting its biggest one-day drop since early September. The decline was sparked in part by the rising number of coronavirus cases and an inability by lawmakers to push forward on new fiscal stimulus. Senate Majority Leader Mitch McConnell adjourned the Senate until Nov. 9, further diminishing the prospects of a deal being reached before the election.
Investors are also bracing for a potentially contested election result, which could lead to volatile trading in the markets.
"The biggest risk appears to be the threat of a contested election and the country not knowing the winner of the Presidential election next Tuesday night," Brian Price, head of investment management for Commonwealth Financial Network, told CNBC." I think that investors are taking some chips off the table or increasing their hedging positions in advance of what could be a tenuous period for risk assets."
A slew of large-cap companies reported quarterly earnings on Tuesday, including Dow components 3M and Caterpillar. Caterpillar reported a steep drop in year-over-year earnings and 3M slid 3.1% even after posting stronger-than-expected earnings and revenue.
Wall Street was also gearing up for Microsoft earnings after the bell on Tuesday. The technology giant saw revenue grow 13% during the second quarter despite the pandemic.
Nearly 170 S&P 500 companies had reported third-quarter earnings through Tuesday morning, according to data from The Earnings Scout. Of those companies, 83% have posted better-than-expected earnings, the data showed. However, some investors think these results do not reflect a broad recovery in Corporate America.
"We thought the bar was set really, really low," said Tom Hainlin, global investment strategist at Ascent Private Capital Management. "To us, this is not a signal of deep strength across the corporate sector."
He noted, however, these results do show a "sequentially positive improvement" from the previous quarter.
AMD said it was buying rival Xilinx in a $35 billion all-stock deal in a push for the data center market. Xilinx gained 8.6% on the news. AMD shares dipped 4.7%.
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