By Lewis Krauskopf
(Reuters) - Wall Street sold off on Tuesday as disappointing corporate reports gave a sour tone to the start of earnings season and investors digested possible changing dynamics for the upcoming U.S. elections.
Alcoa (N:AA) shares tumbled 10.9 percent after the metals company's quarterly profit missed estimates and lowered its revenue forecast.
Illumina (O:ILMN) shares plummeted 25.6 percent and were among biggest drags on the S&P 500 after the diagnostic test maker's weak quarterly update.
Investors have been looking for U.S. corporate earnings to strengthen after four quarters of declines, in order to support relatively high valuations for stocks. Although overall earnings of S&P 500 companies are currently expected to fall 0.7 percent in the third quarter, according to Thomson Reuters data, a typical number of better-than-expected reports would result in a positive quarter.
"You are coming up against very low expectations, which means the bar is already low. If you can't match those expectations, then investors are going to quickly move to the exit," said Adam Sarhan, chief executive at Sarhan Capital.
Market watchers are also increasingly eyeing politics as the Nov. 8 U.S. elections draw near. Recent turmoil facing Republicans and the party's presidential candidate Donald Trump is leading to some speculation that a victory by Democratic rival Hillary Clinton could be accompanied by big gains by her party in Congress, investors said.
"There is more discussion that the control in Congress could possibly shift," said Ernie Cecilia, chief investment officer of Bryn Mawr Trust in Bryn Mawr, Pennsylvania. "The bottom line is that it’s not really priced into the market."
The Dow Jones industrial average (DJI) fell 226.1 points, or 1.23 percent, to 18,102.94, the S&P 500 (SPX) lost 30.1 points, or 1.39 percent, to 2,133.56 and the Nasdaq Composite (IXIC) dropped 89.32 points, or 1.68 percent, to 5,239.35.
All 11 major S&P sectors were negative. Healthcare (SPXHC), one of the sectors thought to be most sensitive to the outcome of the elections, led declines. The group slumped 2.6 percent, with fallout from Illumina's report also weighing.
Another healthcare company, St Jude Medical (N:STJ), fell 3.4 percent after it said it would recall some of its implanted heart devices due to risk of premature battery depletion. Abbott Laboratories (N:ABT), which has agreed to buy St Jude, fell 5.4 percent.
Adding to potential obstacles for stocks, investors are now bracing for the Federal Reserve to raise interest rates by the end of the year after a recent run of solid economic data. The dollar (DXY) on Tuesday rose to its highest point since March against a basket of currencies, a pressure point for multi-national companies.
For the year, the S&P 500 is up about 4 percent.
Declining issues outnumbered advancing ones on the NYSE by a 8.38-to-1 ratio; on Nasdaq, a 5.36-to-1 ratio favored decliners.
The S&P 500 posted 4 new 52-week highs and 4 new lows; the Nasdaq Composite recorded 42 new highs and 52 new lows.