The broad sell-off Tuesday followed a spike in bond yields, which sent the 10-year Treasury yield to its highest in nearly seven years.
The yield, a barometer for mortgage rates and other financial instruments, has jumped recently on signs of rising inflation, which sparked market speculation for more rate hikes later this year. Homebuilders fell sharply as a result.
"The most notable of these is the retail sales data for April, which is expected to be relatively good for a second consecutive month following a few poor numbers that were a little worrying", Craig Erlam, a senior market analyst for Oanda, said in a commentary. The Nasdaq composite climbed 32 points, or 0.4 percent, to 7,435.
Technology and health care companies took some of the worst losses.
Banks bucked the downward trend Tuesday and rose along with bond yields.
The rise in bond yields pulled down shares in real estate investment trusts and other high-dividend paying stocks. Germany's DAX fell 0.1 percent after new data showed the country's economy slowed in the first quarter.
The declines Tuesday put the Dow Jones industrial average on track to end an eight-day winning streak.
BOND YIELDS: Bond prices fell. Mortgage rates, which have been rising this year, tend to track the movement in the 10-year Treasury yield. The S&P 500 closed at 2,711.45 for a loss of -18.68 points or -0.68%.
The Russell 2000 is down 6.45 points, or 0.4 percent.
Japan's benchmark Nikkei 225 edged down 0.2 percent to 22,818.02.
The prospect of higher mortgage rates weighed on home builders, while the rise in bond yields sent stocks that pay high dividends lower. That yield is used to set interest rates on mortgages and other kinds of loans. MGM Resorts rose 1.6 percent.
The Dow Jones industrial average gained 68 points, or 0.3 percent, to 24,899.
Viacom slumped 6 percent and CBS rose 4 percent after CBS sued to block efforts to force the company combine with Viacom.