The tech-heavy index shed 2.17% to end at 13,973.45, while the S&P 500 pulled back 1.38% to close at 4,513.39. The Dow Jones Industrial Average tumbled 348.16 points, or 0.98%, to finish at 35,282.52.
Fitch Ratings cut the long-term foreign currency issuer default rating for the U.S. to AA+ from AAA Tuesday night, citing "expected fiscal deterioration over the next three years."
The last time the U.S. got a downgrade from a major ratings agency was in 2011 when Standard & Poor's cut the rating to AA+ from AAA.
"Investors may use this Fitch downgrade as a reason to take some profits, but we think that was probably a natural part of the market cycle anyway, after such a strong run, very little volatility," said Mona Mahajan, senior investment strategist at Edward Jones. "Broadly speaking, this hasn't deterred our fundamental view of the economy or markets."
The economic picture continues showing signs of resilience, and conditions look very different compared to the last time U.S. credit got a rating downgrade, she added.
Wednesday's selloff bucked the recent months-long uptrend fueled by growth stocks. Technology stocks led the declines as the 10-year Treasury yield hit its highest level since November. Chinese tech names JD.com and Baidu fell more than 4% after China proposed limits on smartphone use for minors. Alibaba dropped 5%. Mega caps Amazon, Alphabet, Microsoft more than 2% each, while Nvidia shaved off nearly 5%.
Jay Woods, chief global strategist at Freedom Capital Markets, called Wednesday's move out of technology stocks and into defensive sector a long overdue "constructive rotation" after the tech-fueled rally.
"There is money still being put to work," he said. "There's no rush to the exits right now. It's just a headline that's given us fuel to finally move some chips around a little bit without upsetting the general overall trends, which have been up since the beginning of the year when it comes to tech."
Meanwhile, Wall Street scrutinized a fresh batch of earnings results. CVS Health rose 3.3% after posting strong earnings as it trims costs, while Humana gained 5.6% after posting lower-than-expected medical costs. Advanced Micro Devices fell 7% after issuing a disappointing forecast a day earlier, dragging down other chip stocks. Meanwhile, SolarEdge Technologies tumbled 18.4% a day after it missed revenue expectations.
Earnings season is more than halfway through and continue to come in stronger than expected. Of the S&P 500 companies that have reported, about 82% have posted positive surprises, according to FactSet data.
— CNBC's Darla Mercado contributed to this report.
Stocks finish lower, Nasdaq logs worst day since February
Stocks hit selloff mode Wednesday, with the Nasdaq Composite notching its worst day since February.
The Nasdaq Composite index shed 2.17% to end at 13,973.45, while the S&P 500 pulled back 1.38% to close at 4,513.39. The Dow Jones Industrial Average tumbled 348.16 points, or about 0.98%, to finish at 35,282.52.
— Samantha Subin