The Dow Jones Industrial Average finished down 107 points, or 0.31%, to 34,888, the S&P 500 declined 0.35% and the Nasdaq was off 0.38%. All three indexes came off record closes they'd set on Monday.
The S&P 500 and Nasdaq on Tuesday set all-time intraday highs.
The yield on the benchmark 10-year Treasury rose Tuesday to 1.408% after the inflation spike and after an auction of $24 billion of 30-year debt saw tepid demand.
The Consumer Price Index accelerated at a faster-than-expected clip in June, according to the Bureau of Labor Statistics, adding further pressure to the Federal Reserve's view that rising prices will ease into the start of next year.
The CPI in June was estimated to have risen 5.4% from the prior month, above economists' forecasts and the most since 2008. Core inflation jumped to 4.5% from 3.8%.
"Every successive high inflation read will make it harder and harder for the Fed to remain accommodative," said Mike Loewengart, managing director of investment strategy at E-Trade. "And on the markets front, we may experience a bit of a tug of war as traders balance the economic data with strong bank earnings beginning to roll in."
Earnings from Goldman Sachs beat Wall Street estimates on higher asset management and investment banking revenue.
Expectations that second-quarter earnings will be strong gave a boost to stocks on Monday, when the three major benchmarks again closed at record highs. The Dow finished just below 35,000.
Analysts surveyed by FactSet expect profits for S&P 500 companies to have risen 64% in the second quarter from the same quarter in 2020, a period when business activity was slowed considerably by the coronavirus pandemic. That would be the highest growth in more than a decade.
"We ran out of superlatives to describe corporate America’s stunning performance during first-quarter earnings season. Despite lofty expectations, results exceeded expectations by one of the biggest margins ever," said Jeff Buchbinder, equity strategist, and Ryan Detrick, chief market strategist, for LPL Financial.
"So what will companies do for an encore? We expect more good news this quarter as more of the economy has opened up, while also acknowledging the second quarter will almost certainly end up being the peak in earnings growth for this cycle," they added.
James Bullard, the president of the St. Louis Federal Reserve Bank, told The Wall Street Journal that the central bank should start pulling back on the extraordinary support it has been providing to the U.S. economy during the pandemic, though not immediately.
"I think with the economy growing at 7% and the pandemic coming under better and better control, I think the time is right to pull back emergency measures," Bullard said in an interview.