The stock market has been on a bull run for more than five years, with the most recent leg of that surge pushing the Standard & Poor's 500 index to an all-time high a week ago. Investors are now getting concerned that stocks may have climbed too far and reflect too much optimism on the outlook for growth.
Stocks started the day lower after a dose of bad earnings news, and the losses accelerated throughout the day.
"We've been on a strong run," said Jerry Braakman, chief investment officer at First American Trust. "There's just more concern that stock valuations are rich compared to historical norms."
The S&P 500 dropped 39.40 points, or 2 percent, to close at 1,930.67, its biggest loss since April 10. The drop pushed the index to its first monthly loss since January.
The Dow Jones industrial average plunged 317.06 points, or 1.9 percent, to end at 16,563.30. The Nasdaq composite fell 93.13 points, or 2.1 percent, finishing at 4,369.77. The Russell 2000, an index of small company stocks, plunged 26.50 points, or 2.3 percent, to 1,120.07
Exxon Mobil stock fell $4.31, or 4.2 percent, to $98.94 after the energy company said that oil and gas production slipped 6 percent, disappointing analysts. The decline was driven by the expiration of rights to a field in Abu Dhabi and natural field declines.
Investors are also concerned about the outlook for growth in Europe as tensions escalate between the European Union and Russia after the downing of a passenger plane over Ukraine. The European Union on Thursday revealed the details of broad economic sanctions against Russia.
The main force behind Thursday's sell-off was a reassessment of the outlook for interest rates in the U.S. said Paul Zemsky, chief investment officer of Multi-Asset Strategies and Solutions at Voya Investment Management.
Fed policymakers said the central bank would make further cuts to its monthly bond purchases, a program that is intended to keep long-term interest rates low and encourage borrowing and spending. Policymakers are also becoming more optimistic about the outlook for the U.S. economy after growth expanded by a better-than-expected 4 percent in the second quarter.
"We're closer to the first move higher in interest rates," said Zemsky. "And there's definitely a camp that believes that the only reason that were at these levels is because the Fed has kept the rates at zero."
Despite Thursday's weak earnings reports, the overall outlook for company profits is still strong, said Zemsky.