Unlike last year, investors have so far been reluctant to buy stocks when the market has slumped. Instead they appear to be waiting for more news before committing, said Peter Cardillo, chief market economist at Rockwell Global Capital.
"At these high levels, people aren't going to step in" until they get more evidence of earnings growth or better economic news, Cardillo said. "Until that happens, who's going to step up to the plate?"
The Standard & Poor's 500 index dropped 23.17 points, or 1.3 percent, to 1,819.20, the biggest decline for the index since Nov. 7. After surging almost 30 percent last year, the S&P 500 index is down 1.6 percent in January.
The Dow Jones industrial average fell 179.11 points, or 1.1 percent, to 16,257.94. The Nasdaq composite dropped 61.36 points, or 1.5 percent, to 4,113.30.
All 10 sectors in the S&P 500 fell.
Energy stocks were among the biggest decliners, dropping 1.9 percent after the price of oil slumped close to its lowest in eight months. Exxon Mobil fell $1.97, or 2 percent, to $98.55.
Oil fell 92 cents, or 1 percent, to $91.80 a barrel as Libyan production continued to ramp up and the possibility of increased crude exports from Iran raised the prospects of excess supply on global markets.
Investors are also worried about more cuts to the Federal Reserve's big economic stimulus program.
Dennis Lockhart, the President of the Federal Reserve's Atlanta branch, said Monday that he would support further cuts "over the course of this year" if the economy continued to improve. Policymakers said in December that they intended to reduce their purchases of bonds by $10 billion a month to $75 billion a month. The Fed's stimulus was a key driver of the market's rally last year.
For many investors, the focus this week will be on company earnings.
JPMorgan Chase, Wells Fargo and Bank of America are among the big banks that are scheduled report fourth-quarter earnings this week. Best Buy and General Electric are among the non-financial companies that will report earnings.
"The market will take its direction from how well, or how poorly, corporate earnings season is unfolding," said Phil Orlando, chief equity market strategist at Federated Investors. "I think we're setting up for a positive surprise."
Analysts expect fourth-quarter earnings to rise by 5.3 percent for S&P 500 companies, according to S&P Capital IQ. That would be a slight drop from the 5.7 percent rate in the previous quarter.
Bond prices rose. The yield on the 10-year Treasury note fell to 2.83 percent from 2.85 percent on Friday.
Among other stocks making big moves:
Lululemon Athletica fell $9.90, or 16.6 percent, to $49.70 after the high-end yoga apparel maker said sales have dropped off in January and its fourth-quarter results will be lower than expected.
Scripps Networks slumped $5.70, or 7 percent, to $76.31 after the Wall Street Journal reported that talks about a merger between the cable network operator, which owns HGTV, and Discovery Communications had ended.
Beam, the maker of Jim Beam, Maker's Mark and other liquors, jumped $16.45, or 24.6 percent, to $83.42 after the company announced that it had agreed to be acquired by Japan's Suntory for $14 billion.