The International Monetary Fund has cut back its forecast for global economic growth, causing US stocks to slide, despite signs that the US economy is strengthening.
The US stock market closed lower over investor fears that global economic growth is slowing. A weak report on industrial production in Germany, Europe's biggest economy, which has dropped the most in five years, added to the concerns.
The Dow Jones industrial dropped 272 points, or 1.6%, to 16,719 on Tuesday.
The Standard and Poor's 500 fell 29 points, or 1.5%, to 1,935. The Nasdaq fell 69 points, or 1.6%, to 4,385.
"Investors have become a bit more cautious about earnings and about the pace of global growth," said Kate Warne, a principal at Edward Jones, an investment firm. "That reassessment is leading to a bit more caution on stocks."
Industrial companies, whose fortunes are closely linked with the global economy, led the sell-off, according to an AP report. Government bonds rallied as investors snapped up safe assets, pushing the yield on the benchmark 10-year Treasury note close to its lowest level of the year.
General Motors was among the biggest decliners in the S&P 500 after analysts at Morgan Stanley cut their price target for the stock. The analysts predict that the car maker's earnings will suffer as it invests heavily in production. GM's stock dropped $1.98, or 5.9%, to $31.77.
The prospect of sluggish growth in other parts of the world weighing on corporate profits was behind the sell-off, said Jack Ablin, chief investment officer at BMO Private Bank.
"Investors are starting to get worried that Europe is going to dent growth," Ablin said. "It's an open invitation for managements to lower their guidance."
The IMF trimmed its outlook for global economic growth this year and next, mostly because of weaker expansions in Japan, Latin America and Europe. The IMF said that the global economy will grow 3.3% this year, slightly below what it forecast in July.
However, many analysts believe that investors have no reason to panic and should instead focus on signs that the US economy is strengthening.
"Investors should remain comfortable at these levels and not be panicked by the recent volatility," said Sean Lynch, a managing director of global equity research and strategy for Wells Fargo Private Bank.