The Dow Jones industrial average fell around 240 points, with Goldman Sachs contributing the lion's share of the losses. The S&P 500 dropped 1.2 percent, with financials falling more than 2.5 percent to lead decliners. The indexes were also posted their first decline of at least 1 percent since October.
"We're settling back into the middle of the range in the 10-year yield. That certainly has taken the air out of financials lately," said Art Hogan, chief market strategist at Wunderlich Securities.
U.S. Treasury yields traded mixed, with the benchmark 10-year note yield holding around 2.42 percent and the short-term two-year note yield trading around 1.26 percent.
Yields have been falling since last week, when the Federal Reserve raised rates but provided a more dovish outlook than expected.Weaker yields lead to lower interest rates on loans, which hurt financial stocks, particularly banks.
"I'm not overly worried about [financials'] price action today," said Mark Spellman, portfolio manager at Alpine Funds, noting that the economic backdrop remains bullish for the sector.
The SPDR S&P Bank ETF (KBE) and the Regional Banking ETF (KRE) both fell more than 4.5 percent.
The Nasdaq composite reached a fresh all-time high before closing 1.8 percent lower. Shares of Apple hit an all-time high after the firm announced a new version of its 9.7-inch iPad and special editions for the iPhone 7 and iPhone 7 Plus.
The small-cap Russell 2000 underperfomed, falling around 2 percent.
Retail stocks also took a hit Tuesday, as the SPDR S&P Retail ETF (XRT) dropped nearly 2 percent after Rep. Kevin Brady, the Republicans' chief tax writer in the House, told CNBC that a border adjustment tax will probably appear in the final tax reform plan.
"Importers of course don't see the possibility of 'a very positive way' in any fashion and why the retail stocks today are getting hammered with XRT down," said Peter Boockvar, chief market analyst at The Lindsey Group, in a note.
Stocks had traded mostly sideways recently after a sharp postelection rally. Randy Frederick, vice president of trading and derivatives at Charles Schwab, said "there aren't any catalysts to take the market higher, but there aren't any to derail it either."
Entering Tuesday, the S&P 500 had risen just 0.42 percent this month, but had spiked 6 percent for 2017.
Since President Donald Trump's victory last November, expectations for tax reform, deregulation and more government spending have increased dramatically. That said, the Trump administration indicated that health care reform would take place ahead of tax reform.
"If those become bigger fights and everything gets watered down, that could be a disappointment," said Alpine's Spellman.
House Republicans are expected to vote on repealing and replacing the Affordable Care Acton Thursday.
"If we can't get health care reform soon, that doesn't mean we won't get tax reform. It just means it will come later, but the market is not priced in for that," said Wunderlich's Hogan.
The Freedom Caucus, a key group of House Republicans, threatened to issue a formal statement of opposition to the Obamacare replacement bill, which would delay the vote, unless the language in the bill changes dramatically.
Wall Street also focused on the oil market as crude prices briefly rebounded on the possibility of an OPEC supply cut extension.
"If that comes to fruition, that would be a huge plus," said Peter Cardillo, chief market economist at First Standard Financial. "I think the rebalancing in the market is going to take place in the next few months."
West Texas Intermediate futures erased gains to settle 1.82 percent lower at $47.34 per barrel. Oil has been under pressure recently as oversupply concerns pushed prices below $50, a key technical level.
Energy is the worst-performing sector this year, falling around 8 percent.
On the data front, fourth-quarter current account figures showed the deficit fell, hitting its lowest level in more than a year, as an increase in the primary income surplus offset a soybean-driven drop in exports.
Meanwhile, the Philadelphia Federal Reserve nonmanufacturing index slipped in March, but still showed overall business growth.
The dollar fell against a basket of currencies, with the euro hitting its highest level since Feb. 2, after a debate between French presidential candidates eased worries that populist Marine Le Pen would win.
"With fears somewhat receding over the political uncertainty in France coupled with the ECB slowly adopting a hawkish stance, the Euro has found itself back in fashion," said Lukman Otunuga, research analyst at FXTM. "A daily close above 1.0800 could encourage bullish investors to attack the next relevant level at 1.085."
The Dow Jones industrial average fell 237.85 points, or 1.14 percent, to close at 20,668.01, with Caterpillar leading decliners and Coca-Cola outperforming.
The S&P 500 declined 29.45 points, or 1.24 percent, to end at 2,344.02, with financials leading 10 sectors lower and utilities the only advancer.
The Nasdaq composite tumbled 107.70 points, or 1.83 percent, to close at 5,832.53.
About four stocks declined for every advancer at the New York Stock Exchange, with an exchange volume of 1.004 billion and a composite volume of 4.25 billion at the close.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 12.5, up nearly 10 percent.
|10-year yield in 2017. Source: FactSet|
Dow slides nearly 240 as fear returns to market
Is the honeymoon period between Wall Street and President Trump over?
The Dow fell by about 238 points Tuesday, a drop of more than 1%. It was its biggest slide of the year and biggest decline since the election. The broader S&P 500 was also down more than 1%.
Neither index had ended the day with a 1% drop since mid-October. This was their worst day since September.
The Nasdaq, which includes many hot tech stocks such as Apple (AAPL, Tech30), Facebook (FB, Tech30) and Amazon (AMZN, Tech30), fell nearly 2%.
This recent market weakness seems to be a sign that the market tone has shifted to a more negative one, at least temporarily.
CNNMoney's Fear & Greed Index, which tracks seven measures of market sentiment, is now showing signs of Fear. The index was in Extreme Greed territory just a month ago. It all just goes to show how quickly emotions on Wall Street can change.
In fact, some market watchers noted that when everyone is bullish, that's usually a sign that the market could be due for a drop. Too much of a good thing cannot last.
"We are currently experiencing multi-decade high extremes of optimism, and we view this euphoria as a warning sign," said Brad Lamensdorf, founder of research firm LMTR, in a report Tuesday.
Other market experts were suggesting that the slump was due to investors growing skeptical about how quickly things can actually get done in Washington.
"President Trump's legislative agenda is getting mired in a congressional swamp, as starry-eyed optimism runs headlong into bloodshot realism," wrote BMO chief investment officer Jack Ablin in a note to clients Tuesday.
Ablin alluded to concerns that some members of Trump's own party are having with the Republican leadership's plans to repeal and replace Obamacare, lower taxes and spend "bigly" on infrastructure spending.
Shares of the Health Care Select Sector SPDR ETF (XLV), which includes drug makers, insurers and other big health care companies, fell about 1%.
Caterpillar (CAT), which could be a big beneficiary of any new funding to build roads, bridges and a wall on the Mexican border, was down 3%.
"[Trump's] health care proposal appears to be losing momentum faster than most NCAA brackets," Ablin quipped, adding that some Republicans in Congress are "loath to racking up more debt" to pay for stimulus.
Some traders also cited a Reuters story that quoted Sen. Sherrod Brown of Ohio saying that Democrats would not support "a wholesale rollback" of the Dodd-Frank financial regulation rules put into place during the Obama administration.
Brown is the top Democrat on the Senate Banking Committee. Reuters reported that he made the remarks at an American Bankers Association conference.
Bank stocks, which had rallied sharply since November on the hopes Trump would undo Dodd-Frank, were among the biggest losers Tuesday. Bank of America (BAC) plunged nearly 6% while JPMorgan Chase (JPM) and Wells Fargo (WFC) were down about 3%.
One market expert said that the recent slump in stocks shows that investors are now coming to the realization that Trump won't be able to get everything he wants done as fast as he'd like.
"Trump is trying to be the CEO president. That doesn't work in politics," said KC Mathews, chief investment officer with UMB Bank. "Right now, it's all about hope."
But the selloff was broader than banks and health care stocks.
Detroit's Big 3 auto stocks GM (GM), Ford (F) and Fiat Chrysler (FCAU) all fell about 3% even though oil prices were sliding. Auto sales tend to go up when gas is cheaper. But there are growing concerns that the best days for the car companies could be behind them.
Tech stocks fell too, even as the Nasdaq hit record highs earlier Tuesday.
This could be just a healthy pullback after a strong run for the market. Stocks are all still up for the year after all.
And White House press secretary Sean Spicer said Tuesday that the administration has "always cautioned" against looking at "one day" and noted that the market "still continues to be up tremendously."
Few experts are predicting a correction -- which is a 10% pullback from a market high. Even fewer see a bear market, a 20% drop or more, on the horizon.
Mathews said that if Trump doesn't make any significant headway with Congress on some of his key initiatives by late summer, then that could spark a correction.
Bruce Bittles, chief investment strategist with Baird, agreed that it will be key for Trump and Congress to actually get something done in order for the market rally to keep going.
The bull market celebrated its 8th birthday earlier this month. Can it survive to hit a 9th next year?
"It's usually buy the rumor and sell the news. But there is no news yet. There is optimism, but still a lot of caution," he said. "If Washington gets gridlocked, then we run into headwinds."