The S&P 500 and the Dow lost almost 2% on Wednesday, their biggest daily drops in more than a month, after weak economic data fueled recession worries while hawkish comments from Federal Reserve officials soured investor moods further.
Before the market opened, U.S. economic data showed retail sales and producer prices declined more than expected in December, while production at U.S. factories fell more than expected and November output was weaker than thought.
"It seems that investors are finally coming to the conclusion that getting inflation under control is not a free lunch and that all the tightening the Fed has had to do to get inflation moving in the right direction, comes with economic costs," said Michael Reynolds, vice president of investment strategy at Glenmede.
"Investors may have had this false belief that this soft landing scenario was a higher probability event than it actually is."
The Dow Jones Industrial Average fell 613.89 points, or 1.81%, to 33,296.96 and the S&P 500 lost 62.11 points, or 1.56%, to 3,928.86. The Nasdaq Composite dropped 138.10 points, or 1.24%, to 10,957.01.
Wednesday's decline was Nasdaq's first loss in eight sessions while the S&P and the down both saw their biggest daily percentage declines since Dec. 15.
With Wall Street's major averages showing gains so far for 2023, Sam Stovall, chief investment strategist at CFRA research, said some investors saw weak data as an opportunity to take profits.
"The market was overbought. Today's economic data served as a trigger to initiate a profit taking spell and the groups with most profits to take have been the ones that have done best last year," said Stovall.
The weakest sectors on Wednesday were the defensive consumer staples, down 2.7%, and utilities, which fell 2.4%. In comparison, the best performers were more growth heavy sectors such as communications services, down 0.9%, and technology, down 1.3%.
Earlier in the day, St. Louis Fed President James Bullard and Cleveland Fed President Loretta Mester stressed on the need to raise rates beyond 5% to bring inflation to heel.
And late in the afternoon, Philadelphia Federal Reserve President Patrick Harker said that he expects the Fed to raise rates a few more times this year although he reiterated earlier comments that he's ready for the U.S. central bank to move to a slower pace of rate hikes due to signs of cooling inflation.
The Fed commentary also highlighted the disparity between the U.S. central bank's estimate of its terminal rate and market expectations, which were of the rate peaking at 4.88% by June. Traders are now betting on a 25-basis point rate hike in February.
Investors are also focused on the fourth-quarter earnings season as a window into how corporate America is doing against the backdrop of higher interest rates.
Analysts now expect year-over-year earnings from S&P 500 companies to decline 2.6% for the quarter, according to Refinitiv data, compared with a 1.6% decline in the beginning of the year.
Moderna Inc shares rose 3.3% after reporting data which demonstrated the effectiveness of its respiratory syncytial virus (RSV) vaccine.
PNC Financial Services Group Inc shares tumbled 6% after it missed estimates for its fourth-quarter profit.
Declining issues outnumbered advancing ones on the NYSE by a 1.88-to-1 ratio; on Nasdaq, a 1.98-to-1 ratio favored decliners.
The S&P 500 posted nine new 52-week highs and 2 new lows; the Nasdaq Composite recorded 78 new highs and 20 new lows.
On U.S. exchanges 11.76 billion shares changed hands on Wednesday compared with the 10.45 billion average for the last 20 sessions.
