Traders increased bets on an interest rate hike at the U.S. Federal Reserve’s September 15-16 meeting after the Labor Department reported last week that employers added far more positions than expected in August.
This week's producer and consumer price reports are seen as key data ahead of that decision, with policymakers looking for further evidence that inflation pressures are continuing to cool.
Traders see a 60% chance of an increase in interest rates at next week's Fed policy meeting, according to the CME FedWatch tool.
According to preliminary data, the S&P 500 lost 44.66 points, or 0.58%, to end at 7,673.94 points, while the Nasdaq Composite lost 83.30 points, or 0.31%, to 26,423.69. The Dow Jones Industrial Average fell 617.15 points, or 1.16%, to 52,797.10.
The S&P 500 has gained about 12% in 2026, and it remains down about 1% from its record-high close on August 13.
The benchmark stock index is now valued at 19 times expected earnings, down from 21 in early June, according to LSEG data. That lower valuation reflects increased earnings expectations following a strong second-quarter reporting season.
Despite that increased earnings optimism, the U.S.-Israeli war with Iran has remained an overhang on equities.
Oil prices touched a six-week high on Tuesday after Iran-backed Houthis in Yemen attacked Saudi energy facilities, setting oil installations ablaze and threatening a major expansion of the six-month-old Middle East war.
Shipping traffic through the Strait of Hormuz slowed, with Iran threatening on Monday to retaliate for any new U.S. attacks.
"The conflict between the United States and Iran is beginning to look less like a temporary disruption and more like a longer-term backdrop for markets," said Jeff DerGurahian, chief investment officer at loanDepot.
The S&P 500 energy index rose, with Marathon Petroleum and Occidental Petroleum both up.
Elevated yields on risk-free U.S. Treasuries have in recent weeks made it less attractive for investors to take on the added risk of buying stocks.
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