A RAF Lockheed Martin F-35B fighter jet taxis along a runway after landing at the Royal International Air Tattoo at Fairford, Britain July 8, 2016.
A RAF Lockheed Martin F-35B fighter jet taxis along a runway after landing at the Royal International Air Tattoo at Fairford, Britain July 8, 2016. Reuters / Peter Nicholls

Wall Street's main indexes headed lower on Monday, with bank stocks leading the drop, after the West hit Russia with unprecedented sanctions following its invasion of Ukraine.

JPMorgan Chase & Co, Bank of America and Goldman Sachs all shed close to 3%, dragging down the S&P 500 banks index by 2.7%. The wider financial index dropped 1.9%, falling the most among the 11 major S&P sectors.

Russia's rouble tanked to record lows, world stock markets fell and safe-haven assets got a boost after the Western allies imposed new sanctions that limited Moscow's ability to deploy its $630 billion foreign reserves and cut off its banks from the SWIFT global payments system. [GLOB/MKTS]

"Investors are trying to digest the potential impact of the economic sanctions - that's really more dominant in investors thoughts than the actual potential for greater military conflict," said Rick Meckler, partner at Cherry Lane Investments in New Vernon, New Jersey.

The worsening geopolitical crisis has added to investor concerns over soaring inflation and the Federal Reserve's plans to tackle it, putting all the major U.S. stock indexes for their second straight month of losses.

The S&P 500 and the Nasdaq are set for their steepest two-month fall since the pandemic-led crash in March 2020.

"We believe that the risk of a Fed policy mistake is rising given that the Russia/Ukraine situation has further clouded the inflation picture and it will also intensify economic headwinds," said Chris Senyek, chief investment strategist at Wolfe Research.

"Until there's more clarity around inflation, future Fed actions, and geopolitical tensions, we generally favor a combination value (particularly energy) and defense (e.g., staples & health care).

Defense stocks Raytheon Technologies, Lockheed Martin Corp, General Dynamics Corp, Northrop Grumman and L3Harris Technologies gained between 3.1% and 4.6% following news that Germany would increase its military spending.

At 10:07 a.m. ET, the Dow Jones Industrial Average dropped 442.67 points, or 1.30%, to 33,616.08 and the S&P 500 fell 44.39 points, or 1.01%, to 4,340.26.

The Nasdaq Composite slipped 81.87 points, or 0.60%, to 13,612.75, still faring better than its peers, thanks to support from Tesla and cybersecurity stocks.

Palo Alto Networks, Fortinet, Zscaler and CrowdStrike Holdings climbed between 1.5% and 5.3%.

The CBOE volatility index, also known as Wall Street's fear gauge, was last trading at 30.73.

Delta Air Lines Inc dropped 4.8% to lead losses among the airline stocks after Russia closed its airspace to airlines from 36 countries in response Ukraine-related sanctions targeting its aviation sector.

First Horizon Corp surged 29.5% after TD Bank Group offered to acquire the U.S. bank in an all-cash deal valued at $13.4 billion.

Declining issues outnumbered advancers for a 1.89-to-1 ratio on the NYSE and a 1.62-to-1 ratio on the Nasdaq.

The S&P index recorded 12 new 52-week highs and 4 new lows, while the Nasdaq recorded 26 new highs and 46 new lows.