The technology-laden Nasdaq dives on news that Microsoft failed to soar past analysts' estimates, prompting the decline of other major indexes.
The Dow shed about 130 points, while the Nasdaq fell 21 points as investors secured profits gained in the past month.
Before investors shed too many tears, they might consider the gains made in the past month. The Dow is still up 168 points since the start of July, while the Nasdaq is up 110 points for the month, or roughly 7 percent.
Technology stocks, whose enthusiastic gains helped lead the market higher recently, tumbled and dragged other sectors down, analysts said.
Microsoft's earnings, reported after the market's close yesterday, may have added fuel to the fire, analysts said. Even though the company reported record growth and beat expectations by a penny, it failed to report blockbuster earnings growth that investors have come to expect from the software giant. (See related story)
Microsoft's stock closed down 9 at 140-1/2. Volume for the company was nearly double average trading at just shy of 20 million shares. Chip maker Intel (INTC) lost 1-3/8 to 86-7/16, Ascend Communications (ASND) fell 2-3/8 to 50-1/16, and Compaq Computer (CPQ) lost 4 to 128-1/8.
"Without a doubt, it's profit-taking," said Frank Calta, managing director of institutional trading at Dain Bosworth. "People used Microsoft as an excuse to sell."
Doug Cliggott, U.S. equity strategist at J.P. Morgan noted: "When you look at relative sector performance today, everything is going down. We have had an amazing move since the Memorial Day weekend and we are consolidating."
IBM (IBM), meanwhile bucked the downward trend, as expectations are high for the computer maker's earnings, which will be reported Monday. Big Blue's stock gained 4-7/8 to close at 104-1/2. (See related story)
"The only bright spot in the tech world is IBM," said Scott Bleier, chief investment strategist at Prime Charter.
Merrill Lynch said it raised its 12-month IBM price target to $150 per share, saying investor enthusiasm for the company's prospects were growing.
The stock market also had to contend with the expiration of index futures and options, which added volatility.
In other trading, Motorola (MOT) lost 7 to close at 82 a share. Robertson Stephens analyst George Robertson downgraded the company to long-term "attractive" from "buy."
Goldman Sachs raised its fiscal 1998 earnings-per-share estimate on Sun Microsystems (SUNW) by fifteen cents to $2.35 a share and raised its price target to $60 a share. The firm kept the stock on its U.S. "recommended" list.
Reuters contributed to this report.