Wall Street's main stock indexes closed sharply lower on Tuesday after stronger-than-expected retail sales data stoked worries interest rates could stay higher for longer, while U.S. big banks dropped on a report that Fitch could downgrade some lenders.
The Commerce Department report showed retail sales grew 0.7% last month against expectations of a 0.4% rise, suggesting the U.S. economy remains strong.
After the data, traders' bets of a pause on hikes by the Federal Reserve next month stayed intact at 89%, yet analysts said investors were worried rates could stay at current levels longer than anticipated.
Banks saw the brunt of the selling as investors grew more anxious about interest rates. The U.S. Treasury yield curve has been inverted for over a year, with longer-term bonds yielding less than short-term debt instruments. This persistent situation pressures profits that banks can earn on loans.
"We would probably end up with an inverted yield curve for longer than anticipated, even if we don't end up with an economic recession," said Sam Stovall, chief investment strategist at CFRA Research.
"That would end up curtailing lending because even if you were my brother-in-law, I wouldn't want to lend to you at a loss."
The S&P 500 dropped 1.16% to end the session at 4,437.86 points.
The S&P 500 closed below its 50-day moving average for the first time since March.
The Nasdaq declined 1.14% to 13,631.05 points, while Dow Jones Industrial Average declined 1.02% to 34,946.39 points.
Volume on U.S. exchanges was relatively light, with 10.1 billion shares traded, compared to an average of 10.9 billion shares over the previous 20 sessions.
A report said ratings agency Fitch could downgrade multiple banks. Shares of JPMorgan Chase fell 2.5%, Bank of America fell 3.2% and Wells Fargo dropped 2.3%.
"The story from Fitch about potential downgrades to multiple U.S. banks (is) weighing on sentiment," said Michael James, managing director of equity trading at Wedbush Securities.
"You combine that with the retail sales figures this morning that were a little hotter than estimates, (it) furthers the potential higher for longer rates scenario from the Fed."
Shares of regional lenders PacWest Bancorp, Zions Bancorp and Western Alliance Bank slipped between 3.7% to 4.5% after the Federal Deposit Insurance Corp's latest regulatory overhaul proposal.
The S&P 500 banking index hit a one-month low, down 2.75%, while the KBW regional banking index also plunged 3.4%.
All 11 major S&P 500 sectors declined, with energy stocks leading losses on weaker crude prices.
Technology stocks fared slightly better, thanks to 0.4% rise in shares of Nvidia after UBS and Wells Fargo lifted their price targets on the stock.
Nvidia posted its biggest one-day percentage since late May in the previous session following bullish comments from Morgan Stanley, with analysts also saying investors were piling into the stock in the run-up to its earnings next week.
U.S.-listed shares of Chinese companies also dropped with e-commerce firm Alibaba Group down 2% and among those leading the slide after another round of disappointing economic data from
Among other stocks, General Motors fell 2.3% after Berkshire Hathaway cut its stake in the automaker.
Warren Buffett's Berkshire disclosed a new investment in homebuilder D.R. Horton, which ended 2.9% higher.
Declining issues outnumbered advancing ones on the NYSE by a 5.24-to-1 ratio; on Nasdaq, a 2.54-to-1 ratio favored decliners.
The S&P 500 posted 3 new 52-week highs and 19 new lows; the Nasdaq Composite recorded 45 new highs and 198 new lows.