Stocks recovered from their worst levels but still closed in the red for a third day Wednesday, with major averages retreating further from their recent highs, amid renewed concerns about when the Federal Reserve may start to wind down its bond-buying program.
"We expect this pullback to hold above 1,650 support on the S&P 500," wrote Elliot Spar, market strategist at Stifel Nicolaus. "However, we also see upside as limited as the technical divergences that we have been sighting are still in place."
The Dow Jones Industrial Average finished in negative territory, dragged by Disney and Bank of America.
The S&P 500 and the Nasdaq also closed lower. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, ended near 13.
Most key S&P sectors ended in the red, dragged by financials and consumer discretionary, while utilities closed higher.
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"At these levels and given how quickly the S&P 500 put on those last 100 points, people seem to be looking for opportunities to take profits," said Chris Bouffard, CIO with The Mutual Fund Store. "But overall, the economic signs are still relatively healthy and earnings are holding up … I would expect the Fed to wait until the end of the year to taper."
On Tuesday, two Fed presidents—Charles Evans of Chicago and Dennis Lockhart of Atlanta—said the central bank would likely start reducing its stimulus program as early as September. Stocks logged their biggest drop since June following the comments.
(Read more: Fed may cut bond buying as soon as next month, Evans)
Cleveland Fed President Sandra Pianalto said she would be ready to wind down the central bank's bond-buying program if the labor market continues on its current path of improvement, but didn't specify a time frame. Philadelphia Fed President Charles Plosser, who was originally scheduled to speak at 12:30 pm, canceled his speech.
On the economic front, mortgage applications edged up last week as potential buyers crept back into the housing market even though rates continued to climb, according to the Mortgage Bankers Association.
And consumer credit rose by $13.8 billion to $2.8 trillion in June, according to Federal Reserve data. Economists polled by Reuters had expected consumer credit to rise $15 billion during the month.
Treasury prices held their gains after the government auctioned $24 billion in 10-year notes at a high yield of 2.62 percent. The bid-to-cover ratio, an indicator of demand, was 2.45, the weakest since March 2009.
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Among earnings, Walt Disney declined after the media conglomerate edged past earnings expectations but projected a massive loss related to its summer film, "The Lone Ranger." Analysts were mixed on the stock—Bernstein raised its price target on the company to $76 from $73, while RBC cut its target price to $71 from $72.
Time Warner rose after the media corporation beat earnings and revenue forecasts. In addition, the company said it expected mid-teens percentage earnings growth for the full year, up from the low double-digit estimates it previously provided.
Meanwhile, First Solar plunged to lead the S&P 500 laggards after the solar company posted quarterly results that were below expectations and cut its full-year outlook.
Groupon, Green Mountain Coffee Roasters, Mondelez International, Tesla Motors and Transocean are among notable companies slated to post results after the closing bell.
In Asia, the Nikkei ended below the key 14,000 level and the Japanese yen hit a six-week high against the dollar. Australia's S&P ASX 200 index and South Korea's Kospi hit two-week lows.
Meanwhile, the Bank of Japan began a two-day policy meeting on Wednesday with an outcome due on Thursday. While analysts expect no action, the direction of the yen will hinge on the central bank's statement.
Shares in Europe closed lower amid concerns that both the U.K. and U.S. central bank may tighten monetary policy earlier than anticipated. Bank of England's Mark Carney unveiled U.S. Fed-style forward guidance, and said Britain's central bank will not raise interest rates until U.K. unemployment hits 7 percent.
Meanwhile, Fitch affirmed Germany's rating at 'AAA' with a stable outlook.