Equities slumped after Alcoa slashed its outlook for global aluminium demand and Chevron warned third-quarter profits will not meet expectations, bolstering concern about the impact of slowing economic growth on corporate earnings.
Shares of Alcoa dropped 4.5 per cent after the company predicted China's slowing growth will weaken worldwide demand for aluminium. Shares of Chevron shed 4.4 per cent after it said third-quarter earnings will be "substantially" lower than in the previous quarter.
In afternoon trading in New York, the Dow Jones Industrial Average shed 0.79 per cent, the Standard & Poor's 500 declined 0.55 per cent, while the Nasdaq Composite Index fell 0.48 per cent.
"The fear is that this is going to be a really bad earnings season," Hank Smith, chief investment officer at Haverford Trust in Radnor, Pennsylvania, told Bloomberg News. "If S&P 500 earnings come in better than expectations, the markets are going to view that positively. We're off to a good start but we've got a long way to go."
Investors are nervous about the recent rally in equity markets.
"The temptation to sell is out there," John Brady, managing director of RJ O'Brien & Associates in Chicago, told Reuters. "Equities have had a tremendous year, and the outlook is very unclear. So why not reduce risk? It's hard to imagine an additional 20 per cent rally from here in the next three or four months."
Indeed, the American economy "generally expanded modestly since the last report," the Federal Reserve said in its latest Beige Book business survey based on reports from 12 district Fed banks.
"Consumer spending was generally reported to be flat to up slightly since the last report," according to the Fed. "Vehicle sales were also generally characterised as stable but up from a year earlier and generally at favourable levels," while "residential real estate conditions improved since the last report."
However, "employment conditions were little changed since the last report."
In Europe, the Stoxx 600 Index finished the day with a 0.6 per cent slump from the previous close. Benchmark indexes dropped also in Germany, the UK and France.
Some investors are concerned that the current valuations aren't justified by the outlook for earnings.
The Stoxx 600 is trading at 11.9 times the estimated earnings of its companies, higher than its five-year average of 11.5, data compiled by Bloomberg show. The gauge last month reached a price multiple of 12.3, the highest since 2010.
Among other sombre notes was a surprise slump in China's car sales, the latest sign that the pace of growth in the world's second-largest economy is flagging.
The concern about earnings and equity valuations helped the US Treasury's auction of US$21 billion in 10-year debt draw solid demand.
"The 10-year note auction was very stellar-coming in better than expected-and equities are weak, giving support to Treasuries," Larry Milstein, managing director in New York of government-debt trading at RW Pressprich & Co, a fixed- income broker and dealer for institutional investors, told Bloomberg. "There is still pretty significant demand out there still for yields and safety."
To be sure, it wasn't all bad news.
Shares of Wal-Mart climbed to a record US$76.8. The world's largest retailer said it is seeing growth in both large and small US stores and has had a strong start to layaway sales ahead of the holiday season, according to Reuters.
Costco, meanwhile, also provided investors with a good reason to buy the stock, last up 2.7 per cent, as the company posted better-than-expected quarterly earnings.