Stocks fell on Tuesday as Federal Reserve Governor Lael Brainard indicated the central bank could take a more aggressive approach to its tightening policy.
The Nasdaq Composite led Tuesday's declines, shedding 2.26% to 14,204.17 and giving up its 1.9% pop in the prior session. The Dow Jones Industrial Average lost 280.7 points, or 0.8%, closing at 34,641.18. The S&P 500 fell 1.26% to 4,525.12 after posting two straight days of gains.
"Ultimately, the way this is going to work, the economy is going to slow, the stock market has to reflect that," Mark Zandi, chief economist at Moody's Analytics told CNBC's "Power Lunch" on Tuesday. "So I do expect the stock market to have a tough few months here as it ultimately adjusts to what the Fed is doing and will do going forward."
Tech stocks were among the biggest losers of the day. Chip stocks contributed to the decline, as Nvidia dropped 5.2% and AMD lost more than 3%. Some believe tech companies could be hurt the most by the Fed's hiking campaign as investors take less risk and buy stocks with steady profits, rather than growth shares promising big earnings down the road.
Meanwhile, sectors like utilities and health care moved higher on Tuesday, with drugmakers Johnson & Johnson and Pfizer rising slightly along with staples like Procter & Gamble and Walmart. Cruise stocks Carnival and Norwegian Cruise Line added more than 2% and 1%, respectively.
"The way the market is acting today, the playbook is defense with commodities-linked sectors outperforming, while technology underperforms on the concern of high interest rates," said Keith Lerner co-CIO and chief market strategist at Truist. "There's concern about the economy and the Fed's ability to maneuver a soft landing."
After opening the day slightly positive, stocks fell and rates hit their highs after Brainard, who is typically considered one of the more dovish Fed members, said the central bank needs to shrink its balance sheet "rapidly" to drive down inflation.
"Inflation is much too high and is subject to upside risks," she said, noting the Fed needed a steady pace of rate hikes as well.
Following her comments, the 10-year Treasury yield jumped to 2.56% and hit its highest level since May 2019.
Recessionary fears continued to spook investors on Tuesday and Deutsche Bank became the first major Wall Street bank to forecast a U.S. recession is ahead, citing the Fed getting more aggressive to fight inflation.
"The US economy is expected to take a major hit from the extra Fed tightening by late next year and early 2024," the bank's economists said in a note to clients Tuesday. "We see two negative quarters of growth and a more than 1.5% pt rise in the US unemployment rate, developments that clearly qualify as a recession, albeit a moderate one."
As the Russia-Ukraine war continues, investors watched Ukrainian President Volodymyr Zelenskyy call for a Nuremberg-like tribunal to hold Russia accountable for alleged war crimes, during an appearance before the United Nations Security Council.
Oil prices slipped Tuesday, with West Texas Intermediate settling 1.28% lower at $101.96. Brent crude futures fell 0.83% to settle at $106.64. The market has been volatile since the onset of the war amid concerns over supply disruptions.
Tuesday's moves come as investors await the release of Federal Reserve meeting minutes on Wednesday. Those minutes come from last month's meeting when the central bank hiked rates for the first time in years and indicated six more hikes were ahead this year.
Investors are preparing for the first-quarter corporate earnings season, which is set to begin next week.
— CNBC's Patti Domm contributed reporting