Stock indexes fell more than 1 percent on Monday, led by banks on concerns the United States and Europe were not coming to grips with the extent of their debt problems.
U.S. lawmakers scrambled to avoid a default on the country's debt, while the euro zone's regulatory stress tests were viewed as not stringent enough, given the region's fiscal crisis.
Bank of America Corp
Even though there weren't that many banks that failed, the results still seemed to make people a little more cautious, said Michael James, senior trader at Wedbush Morgan in Los Angeles, adding that traders were also nervous about Bank of America's earnings due Tuesday morning.
The Dow Jones industrial average <.DJI> slumped 150.23 points, or 1.24 percent, at 12,330.27. The Standard & Poor's 500 Index <.SPX> dropped 16.02 points, or 1.21 percent, at 1,300.42. The Nasdaq Composite Index <.IXIC> tumbled 37.59 points, or 1.34 percent, at 2,752.12
With five days remaining before U.S. President Barack Obama's deadline for a deal, Republicans and Democrats scrambled to work out details on a fallback plan that would avoid an unprecedented U.S. default.
The longer the debt ceiling debate remains unresolved, the bigger the risk for further declines in stocks and a spike in volatility. The CBOE Volatility index <.VIX> rose nearly 30 percent last week. It was up 11.6 percent on Monday.
The debt ceiling has been the driver for the U.S. market for a month now, and it is going to be the driver for at least a month ahead. said Tom Alexander, the head of a trading firm in Savannah, Georgia. Earnings and Europe are on the back burner. That's minor compared to this situation in Congress.
Expectations for strong earnings could fuel optimism, but may not be enough. Last week's encouraging results from Google Inc
In the latest earnings news, Halliburton Co
Second-quarter earnings for S&P 500 companies are seen rising 6.5 percent, and of the 39 companies in the S&P reporting so far, 74 percent posted higher-than-expected profits, according to Thomson Reuters Proprietary Research.
It remains to be seen whether earnings will be enough to trump the debt issues, said Paul Nolte, managing director at Dearborn Partners in Chicago. Based on last week's trading action, maybe not.
(Reporting by Aleksandra Michalska; additional reporting by Ryan Vlastelica and Ed Krudy; editing by Jeffrey Benkoe)