Investors are suffering another bout of pessimism about the strength of the global economic recovery.
Stocks fell sharply Tuesday, sending the Standard & Poor's 500 index down nearly 1 percent. Demand for the safety of Treasurys sent bond prices higher and interest rates lower, tightening the market barometer known as the yield curve.
A disappointing profit report from Alcoa Inc. and moves by China to curtail growth raised questions about whether a 10-month surge in stocks can be sustained. At the same time, financial stocks slid on concerns the government would impose taxes on bailed out banks.
Alcoa slid 11 percent after its earnings and revenue fell short of expectations. The aluminum producer is usually the first big U.S. company to report quarterly results, and investors look to its numbers for an early read on overall corporate earnings.
Alcoa's report, which blamed weakness in aerospace, construction and gas turbines for the miss, weighed on energy and industrial stocks. The slide comes after Chevron Corp. warned late Monday that it expects thin profit margins will hurt its earnings.
Concerns about the prospects for Alcoa and other companies that produce raw materials rose after China again tightened its monetary policy and raised the amount of money that banks must hold in reserve. The moves are aimed at keeping growth in the country from charging ahead too fast, but could also slow the pace of recovery in other countries and hurt companies that sell resources to the world's most populous nation.
The selling extended beyond industrials. Traders sold bank shares on worries that Washington will impose a levy to recoup public money lent to financial companies in 2008 and 2009.
Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said banks are getting mixed signals from Washington. Some were told to accept bailout money, then boost lending and now perhaps pay the government as they try to stabilize.
"If I were running a bank I'd feel like a pretzel being pulled in four different directions," he said, adding that hefty requirements from the government could endanger the banks' recovery.
The Dow Jones industrial average fell 36.73, or 0.3 percent, to 10,627.26. The S&P 500 index fell 10.76, or 0.9 percent, to 1,136.22, after advancing for the first six days of the year for the first time since 1987. The Nasdaq composite index fell 30.10, or 1.3 percent, to 2,282.31.
Bond prices rose as questions about the economy increased demand for the safety of government debt. That pushed the yield on the 10-year Treasury note down to 3.72 percent from 3.82 percent late Monday. The yield curve, which is the difference between long-term and short-term yields, narrowed.
The Dow and S&P 500 rose Monday as industrial stocks got a boost from a report that Chinese exports jumped 18 percent in December. That report and other signs of strengthening in China pushed the country to tighten its monetary policy.
Investors found other reasons to be cautious. Video game publisher Electronic Arts Inc. said it did not see a rebound in sales during the most recent quarter. It slashed its full-year earnings forecast after the market closed Monday, saying weakness in game sales didn't ease during the holidays.
Alcoa fell $1.93, or 11.1 percent, to $15.52, posting the biggest drop among the 30 stocks that make up the Dow industrials. Electronic Arts slid $1.42, or 7.8 percent, to $16.85.
Chevron fell 47 cents, or 0.6 percent, to $80.41. Caterpillar Inc., the maker construction and mining equipment, fell $1.89, or 3 percent, to $62.24 after gaining 6.3 percent Monday.
Among financials, Bank of America Corp. fell 57 cents, or 3.4 percent, to $16.36. Regulators filed suit against the company contending that the bank didn't disclose big losses at Merrill Lynch before shareholders voted to combine the companies at the height of the financial crisis in September 2008.
Stephen Carl, head of equity trading at The Williams Capital Group in New York, said the early corporate earnings reports are raising questions about whether companies have reached the limits of how much cost-cutting they can do.
"Now you've got to look for revenues to grow profits and I don't know if they're there," Carl said.
The nervous sentiment in the market was reflected in a spike in the Chicago Board Options Exchange's Volatility Index, which rose 4 percent after falling in the past week. A rise in the VIX, known as the market's fear index, is a sign that investors expect bigger swings in stocks.
The dollar and gold both slipped.
Oil fell $1.73 to settle at $80.79 per barrel on the New York Mercantile Exchange.
The Russell 2000 index of smaller companies fell 8.49, or 1.3 percent, to 635.50.
About two stocks fell for every one that rose on the New York Stock Exchange, where volume came to 1.1 billion shares compared with 967.1 million Monday.
Britain's FTSE 100 fell 0.7 percent, Germany's DAX index dropped 1.6 percent, and France's CAC-40 lost 1.1 percent. Japan's Nikkei stock average rose 0.8 percent.