By Joe Wallace, Frances Yoon and Karen Langley
U.S. stocks fell Wednesday after Federal Reserve Chairman Jerome Powell said further stimulus could be needed to support the economy's recovery from the coronavirus-induced contraction.
The S&P 500 dropped 1.6% as of the 4 p.m. close of trading in New York, extending Tuesday's loss of more than 2%. The Dow Jones Industrial Average lost 2.1%, or 500 points, and the Nasdaq Composite slipped 1.5%.
The declines were broad, with all 11 sectors of the S&P 500 in the red. Shares of beaten-down airline, energy and bank stocks were among the biggest decliners. United Airlines Holdings dropped 8.8%, Halliburton fell 8.9% and Wells Fargo lost 6%.
Investors have been eagerly seeking any clues about the potential length and severity of the economic downturn. In a speech Wednesday morning, Mr. Powell revealed growing alarm about the path ahead, describing the outlook as "highly uncertain and subject to significant downside risks."
"Additional fiscal support could be costly but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery," he said.
Meanwhile, economists surveyed by The Wall Street Journal predicted the U.S. contraction caused by efforts to contain the coronavirus will be larger than previously anticipated. The economists expect gross domestic product to shrink 6.6% this year, measured from the fourth quarter of 2019.
Evidence is growing of the damage already sustained by businesses. A gauge of U.S. business prices posted its largest decrease on record in April as the pandemic curtailed economic activity.
Major U.S. stock indexes have been held up in part by strong investor demand for shares of big tech companies. The S&P 500 has cut its declines for the year to 13%, buoyed by a 28% jump in Amazon and a 13% increase in Microsoft. Some investors say the outperformance of megacap stocks is masking weakness in the broader stock market.
"I think there is a little bit of a nervousness in this market due to thin leadership and the potential that the stay-at-home orders and thus a low-consumption economy will last longer than anyone had expected," said Yousef Abbasi, global market strategist at INTL FCStone. "If it lasts longer than anyone had expected, then you could argue that the recovery becomes that much more arduous."
As the economic outlook darkened, the economically sensitive energy, financial and industrial sectors were among the weakest performers in the S&P 500 on Wednesday. Energy stocks fell 4.5%, while the financial and industrial groups fell at least 2.8%.
Prominent investors have suggested in recent days that stock prices have climbed higher than is justified. Hedge-fund manager David Tepper told CNBC Wednesday that the market was recently "maybe the second-most overvalued I've ever seen." And Stanley Druckenmiller told the Economic Club of New York on Tuesday that "the risk-reward for equity is maybe as bad as I've seen it in my career," according to a Twitter post from the organization.
In recent days, the S&P 500 was trading at 21.14 times projections for earnings over the next 12 months, the highest level since March 2002, according to Dow Jones Market Data. But investors have questioned the reliability of forecasts for profits in the coming quarters, given the uncertainty about the course of the pandemic and economic recovery.
Tensions between the U.S. and China added to the nerves among some investors, who worry new frictions between the two largest economies could exacerbate the global downturn. Sen. Lindsey Graham on Tuesday proposed legislation that would allow President Trump to impose sanctions on China if it doesn't investigate the origins of the pandemic.
"We will have more and more noise around this issue," said Sophie Chardon, a strategist at Lombard Odier. Still, she says she expects Washington will ultimately seek to avoid a repeat of the trade conflict.
"At the end of the day, it's not good for the economy to have very high tariffs -- especially in a year when you have U.S. elections and you already have the Covid crisis," she said.
The yield on the U.S. 10-year Treasury note edged down to 0.654% from 0.679% on Tuesday as bond prices rose, suggesting investors remain risk averse.
In Europe, the benchmark Stoxx Europe 600 fell 1.9%. Benchmarks in Asia ended the day mixed. India's S&P BSE Sensex index jumped 2.2% after Prime Minister Narendra Modi outlined an economic relief package.
Write to Joe Wallace at Joe.Wallace@wsj.com, Frances Yoon at email@example.com and Karen Langley at firstname.lastname@example.org