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The Dow Jones Industrial Average fell 1%, or 361 points, Nasdaq fell 1.1%, and the S&P 500 fell 1% lower.
Retail sales rose 0.7% last month, well above expectations for 0.4%, marking the biggest increase since January.
The data pointing to signs of consumer strength cooled bets the Fed may not have to resume rate hikes later this year, and further pushed out expectations for rate cuts.
Bets on a Fed November rate hike rose to 32.2% from 26.4% last week, according to the CME FedWatch Tool.
But some on Wall Street expect the consumer to tap out sooner rather than later.
“We expect retail sales to weaken through the end of the year is expected as availability of credit weighs on economic activity and the labor market,” Morgan Stanley said in a note.
The 10-year Treasury yield jumped to end the day at their highest level since October amid easing bets of less hawkish Fed action.
Fitch Ratings analyst Chris Wolfe told CNBC on Tuesday that the credit ratings agency may forced to downgrade a slew of U.S. banks including JPMorgan (NYSE:JPM) should the health of the banking sector deteriorate further.
Another downgrade of the U.S. banking industry to A+ from AA-, would force it to reassess its ratings on each of the more than 70 U.S. banks it covers, Wolfe told CNBC.
Regional banks including Citizens Financial Group Inc (NYSE:CFG), KeyCorp (NYSE:KEY), and M&T Bank Corp (NYSE:MTB) led the selling in the sector, but major Wall Street banking including JPM and BAC were more than 2% lower on the day.
Discover Financial Services (NYSE:DFS) also weighed on the sector after falling more than 9% as CEO Roger Hochschild resigned.
Home Depot Inc (NYSE:HD) reported better-than-expected quarterly results, but the home improvement’s downbeat remarks on waning demand for big-ticket, discretionary categories weighed on sentiment. The stock was marginally higher.
Weakness in the shares of Home Depot retail may prove a buying opportunity, Oppenheimer said in a Tuesday note, as home improvement sales are likely to continue to expand.
Longer-term drivers of outsized sales expansion in home improvement retailing remain intact, Oppenheimer said, adding that it continues to “recommend clients use any nearer-term price weakness in HD shares as an intermediate- to longer-term.”
NVIDIA Corporation (NASDAQ:NVDA) pared gains, but still ended the day above the flatzone after {{0UBS, Wells Fargo (NYSE:WFC), and Baird, lifted their price target on the chipmaker amid optimism about AI-driven demand.}}
The chipmaker also attracted demand from the Middle East, with Saudi and the United Arab Emirates snapping up thousands of Nvidia’s high-performance chips, the Financial Times reported Monday.
PayPal Holdings Inc (NASDAQ:PYPL) fell more than 4% after Elliott Investment Management sold its stake in the payments technology company in Q2, a US Securities and Exchange Commission filing showed.
Paramount Global (NASDAQ:PARA) climbed 3% on hopes that talks between Hollywood Studios and the Writer Guild of America are nearing a breakthrough that could end the months long strike by screenwriters.
Hollywood studios made a new offer to the striking writers that included concessions on key issues such as the use of artificial intelligence and access to viewer data, Bloomberg reported Monday.
Caterpillar Inc (NYSE:CAT) fell more than 2% pushing industrials lower as weak growth in China, a key market for the heavy equipment maker, stoked fears about demand.
