The world's two largest economies have pulled back from an immediate escalation of their damaging trade war since they started negotiating last month. President Donald Trump postponed a deadline for raising tariffs on more Chinese goods, citing progress in a series of talks. Now, media reports say the nations could strike a deal this month.
"The devil is still in the details and those details are still pretty sparse at this point," said David Lefkowitz, senior Americas equity strategist at UBS Global Wealth Management. "When tariffs might be removed is definitely a key question, and also there's still some uncertainty about whether or not a deal will be consummated."
The S&P 500 index dropped 10.88 points, or 0.4 percent, to 2,792.81. The index, a benchmark for many mutual funds, is still up 11.4 percent so far this year. The Dow Jones Industrial Average fell 206.67 points, or 0.8 percent, to 25,819.65. The average was briefly down more than 414 points.
The Nasdaq composite lost 17.79 points, or 0.2 percent, to 7,577.57. The Russell 2000 index of smaller companies gave up 14.20 points, or 0.9 percent, to 1,575.44. Major indexes in Europe finished mostly higher.
Investors have been hoping for a resolution in the long-running trade dispute between the world's biggest economies, which centers on China's technological ambitions. Washington claims Beijing is stealing technology and forcing companies to turn over technology in order to do business.
Tit-for-tat tariffs imposed by both nations have raised prices on a variety of goods. Now, both sides could be close to a deal that would call for China to cut tariffs on U.S. farm, auto and other products, while the U.S. removes most sanctions on imports, according to media reports.
Optimism that a trade pact could be finalized soon gave markets an early boost Monday, but the rally faded as traders sized up mixed U.S. construction spending data. The Commerce Department said construction spending edged down 0.6 percent in December amid declines in residential construction and government projects. Even with the December setback, construction spending for all of 2018 reached record levels, though it was the smallest increase seven years.
"It gave people an excuse to sell," said JJ Kinahan, chief market strategist for TD Ameritrade. The construction spending report was good news for homebuilders, which bucked the broader market trend. PulteGroup climbed 3.5 percent, while D.R. Horton rose 3.1 percent.
Health care stocks led the sell-off among companies in the S&P 500. UnitedHealth Group slid 4.1 percent, the biggest loss among the 30 stocks in the Dow. Technology companies and banks also fell. Salesforce.com sank 3.7 percent and Charles Schwab lost 2.5 percent.
AT&T dropped 2.7 percent on news the telecom company is reorganizing its WarnerMedia unit, which includes HBO and Warner Bros. Children's clothing retailer Children's Place gave investors a dismal forecast after reporting a disappointing fourth quarter. The stock skidded 10.3 percent.
The main issue is competition from dying competitors holding liquidation sales. Rivals Gymboree and Crazy 8 stores have been in the process of shutting down, which means liquidation sales and better deals for shoppers.
"We have never experienced a total liquidation of a direct competitor of the size and proximity of Gymboree," Children's Place CEO Jane Elfers said in a prepared statement. Traders bid up shares in gene therapy developer Nightstar Therapeutics 66.1 percent after biotech giant Biogen offered to buy it for $877 million in cash. Nightstar is developing treatments for rare eye conditions.
Biogen and other large drug developers have been trying to expand their portfolios to include gene therapy and treatments for rare conditions. Those treatments are expensive to develop, but command better prices if they make it to market.
U.S. crude rose 1.4 percent to settle at $56.59 a barrel in New York. Brent crude, used to price international oils, gained 0.9 percent to close at $65.67 a barrel in London. Bond prices rose. The yield on the 10-year Treasury note fell to 2.73 percent from 2.75 percent late Monday.
The dollar fell to 111.94 yen from 112.01 yen on Friday. The euro weakened to $1.1325 from $1.1357. Gold fell 0.9 percent to $1,287.50 an ounce. Silver dropped 1 percent to $15.11 an ounce. Copper declined 0.8 percent to $2.91 a pound.
In other energy futures trading, wholesale gasoline climbed 1.1 percent to $1.75 a gallon. Heating oil added 0.7 percent to $2.01 a gallon. Natural gas slid 0.1 percent to $2.86 per 1,000 cubic feet.