Earlier, investors were energized by a surprise gain in retail sales in July. That report provided evidence that American shoppers are still spending even as their counterparts in Europe and Asia slow down.
However, another report showed that U.S. companies weren't restocking their shelves or their warehouses fast enough, a signal that they believed shoppers weren't going to continue spending.
U.S. retail sales rose in July by the largest amount in five months as Americans spent more on cars, furniture and clothes. The 0.8 percent gain was better than analysts were expecting and showed that U.S. consumers spent at stores after cutting back in the April to June period.
"Consumers are still cautious," TD Ameritrade strategist JJ Kinahan said. "Even numbers that are marginally better look good when compared to a trough."
Investors did sell low-risk assets, sending the yield on the benchmark 10-year Treasury note up to 1.73 percent from 1.66 percent late Monday.
Stocks were held back by a report that U.S. companies barely increased their inventories in June. The slower restocking trend could act as a drag on overall economic growth.
Many economists believe the Federal Reserve will try to stimulate the economy by launching another program of buying government bonds and mortgage-backed securities to keep interest rates low. They will be closely watching Fed Chairman Ben Bernanke's speech on Aug. 31 at an annual economic conference in Jackson Hole, Wyo.
Home Depot jumped $1.89 to $54.71. The world's biggest home-improvement retailer posted a 12 percent jump in net income and increased its earnings forecast for the entire year. Home Depot's fortunes are closely tied to the housing market, which has been improving. On Thursday, the Department of Commerce will release the housing starts and building permits report for July.
The number of declining stocks narrowly outpaced rising ones on the New York Stock Exchange. Trading volume was very light at 2.9 billion shares.
Among other big moves:
Groupon plummeted 27 percent. The online coupon company's stock closed at an all-time low of $5.51, down $2.04 after its sales growth fell short of expectations partly due to worsening conditions in Europe.
Estee Lauder rose $5.12, or 9 percent, to $60.13. The beauty company, whose brands include MAC and Aveda, reported results that topped Wall Street expectations. The company also raised its revenue forecast for the year.