NEW YORK (Reuters) - U.S. stocks dropped on Tuesday as investors pulled back from last week's rally on the "fiscal cliff" deal in Washington, and ahead of what is expected to be a weak earnings season.
AT&T Inc (T.N) stock dropped 1.5 percent to $34.42, making it one of the biggest drags on the S&P 500, after the company said it sold more than 10 million smartphones in the quarter. This figure beat the same quarter in 2011, but also meant increased costs for the wireless service provider.
Providers like AT&T pay hefty subsidies to handset makers so that they can offer device discounts to customers who commit to two-year contracts.
After a 4.3 percent jump in the two sessions around the close of the fiscal cliff negotiations, the S&P has fallen and investors have found few catalysts to extend the rally that took the benchmark to five-year highs.
"We had a brief respite courtesy of what happened on the fiscal cliff deal and the flip of the calendar with new money coming into the market," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.
"But now the stark reality of uncertainty with regard to earnings, plus the negotiations on the debt ceiling, are there and that doesn't give investors a lot of reason to take bets on the long side."
The Dow Jones industrial average fell 73.68 points, or 0.55 percent, at 13,310.61. The Standard & Poor's 500 Index dropped 7.31 points, or 0.50 percent, at 1,454.58. The Nasdaq Composite Index lost 12.53 points, or 0.40 percent, at 3,086.29.
Fourth quarter profits are expected to beat the previous quarter's lackluster results, but analyst estimates are down sharply from October. Quarterly earnings are expected to grow by 2.7 percent, according to Thomson Reuters data.
With AT&T's fall, the S&P telecom services index was the worst performer of the 10 major S&P sectors, down 2.6 percent.
Sears Holdings (SHLD.O) shares dropped nearly 5 percent to $40.79 a day after the company said Chairman Edward Lampert would take over as CEO from Louis D'Ambrosio, who is stepping down due to a family member's health issue. The U.S. retailer also reported a 1.8 percent decline in quarter-to-date sales at stores open at least a year.
Markets went lower as some of the first reported earnings were weak.
"It doesn't seem to be bouncing back, it might stay here or sell off a little further," said Stephen Carl, head of U.S. equity trading at The Williams Capital Group in New York.
Shares of restaurant-chain operator Yum Brands Inc (YUM.N) fell 4.2 percent to $65.03 a day after the KFC parent warned sales in China, its largest market, shrank more than expected in the fourth quarter.
GameStop (GME.N) was one of the worst performers on the S&P 500 as shares slumped 5.4 percent to $23.41 after the video game retailer reported low customer traffic for the holiday season and cut its guidance.
Shares of Monsanto Co (MON.N) gained 2.5 percent to $98.40 after reaching a more than four-year high at $99.99. The world's largest seed company raised its earnings outlook for fiscal year 2013 and posted strong first-quarter results.
Education provider Apollo Group (APOL.O) and Dow component Alcoa Inc (AA.N), the largest U.S. aluminum producer, round out the start of earnings season after the closing bell.
(Reporting by Gabriel Debenedetti; Editing by Kenneth Barry and Nick Zieminski)