Investors stared down what promised to be an eventful week packed with earnings, economic data and congressional testimony from US Federal Reserve chair Kevin Warsh.
Chip stocks lead the sell-off
Among the three major US stock indexes, the tech-laden Nasdaq led the losses, followed by the S&P 500.
The Dow's drop was cushioned by rising energy stocks. They were boosted by spiking crude prices due to restricted traffic through the Strait of Hormuz.
"(Stocks) really reached a high at the very end of May, driven mainly by semiconductor(s)," said Thomas Martin, senior portfolio manager at GLOBALT in Atlanta.
"When you move something this far, this fast, you invite the question: how sustainable is it? If the market were cheap, it'd be one thing," Martin added.
"Now there's less cushion and there continues to be a lot of unknowns."
Impact of the US-Iran conflict
The US and Iran exchanged heavy air strikes over the weekend, marking a sharp escalation in the scale and reach of attacks. This prompted Donald Trump to revive the US blockade on Iranian ports, raising concerns about the path forward for peace negotiations.
Crude prices surged, settling up 9.4%, fuelling worries that strained supply and upward energy price pressures could broaden into long-term, systemic inflation.
Inflation and labour in the spotlight
Warsh is due to sit for his first semiannual testimony before Congress on Tuesday and Wednesday. During the testimony, the new head of the central bank will be questioned regarding the inflationary effects of the US-Iran war and the Fed's likely course of action.
Markets are pricing in at least one quarter-percentage-point rate hike by year-end, according to LSEG data.
To that end, the Labour Department is expected to release its consumer (CPI) and producer (PPI) price indices this week. These will give markets and the Fed a glimpse at the extent to which the on-again-off-again US-Iran war affected price growth in June.
The Commerce Department's June retail sales data will provide insight into how well the consumer, who accounts for about 70% of the US economy, is weathering the price squeeze at the petrol pump and elsewhere.
Banks brace for earnings season
The Dow Jones Industrial Average fell 138.31 points, or 0.26%, to 52,498.70, the S&P 500 lost 59.92 points, or 0.79%, to 7,515.47 and the Nasdaq Composite lost 408.43 points, or 1.55%, to 25,873.18.
Major financial firms Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Wells Fargo were all slated to report quarterly results on Tuesday, marking the unofficial start of second-quarter earnings season.
"I wonder if the market is going to really start to revolt a little bit at the deluge of corporate issuance to fund this AI capex that has been called into question for a couple of years now," said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky.
"It'll be interesting to see down the road how the big banks talk about corporate bonds, fixed income and what they have on their books or not."
