Comments by US President Donald Trump that China "has become very spoiled on trade", cast doubt on his efforts to avoid a tariff war between the world's two largest economies, increasing investor jitters at the outset of a second round of high-level negotiations.
Unrest in the Middle East suggested a reduction of oil supply and sent crude prices to their highest level in three-and-a-half years.
"Small caps present a cleaner play than large caps on two fundamental market drivers: lower corporate taxes and a stronger U.S. economy", research firm DataTrek wrote in its morning briefing on Wednesday.
The broader S&P 500 lost 2.33 points (0.09 per cent) to 2,720.13 and the tech-heavy Nasdaq Composite dropped 15.82 points (0.21 per cent) to 7,382.47.
"It doesn't surprise us at all", said Marshall Gause, CEO and chief investment officer at Geneva Fund Partners in Denver.
Trade and oil price concerns have also benefited smaller firms, according to Gause. "I think that they're in a better place", he said. "Global companies are more susceptible to that".
Oil prices gained on Wednesday, shaking off the effects of a strengthening dollar, after an inventory report showed USA crude and gasoline stocks fell more than expected.
Economic reports showed USA unemployment rolls dropping to their lowest level since 1973 and mid-Atlantic manufacturers asking higher prices for their products.
Macy's earnings pushed the consumer discretionary sector higher on Wednesday, a day after government data showing an acceleration of consumer spending fanned inflation concerns and helped send USA government bond yields higher.
United States 10-year Treasury yields closed at 3.1131 per cent, maintaining their near seven-year high and pressuring rate-sensitive sectors as investors ponder whether bonds offer an attractive alternative to riskier equities.
The benchmark Dow Jones Industrial Average fell 54.95 points (0.22 per cent) to 24,713.98.
So-called defensive stocks were among the worst performer among the 11 major sectors of the S&P 500.
Cisco Systems' stock was the biggest drag on the S&P 500 and the Nasdaq, falling 3.8 per cent despite beating profit and revenue estimates in its post-market earnings report.
The S&P 500 Technology sector .SPLRCT was down 0.6 percent.
Walmart shares were down 2.3 percent. Walmart said profit margins remained under pressure due to price cuts and higher freight costs, weighing on its shares even as sales and earnings came in stronger than expected. The stock was up in premarket trading after the retailer posted a rebound in its USA e-commerce business and beat profit estimates.
Advancing issues outnumbered declining ones on the NYSE by a 2.30-to-1 ratio; on the Nasdaq, a 2.62-to-1 ratio favored advancers.
The S&P index recorded 12 new 52-week highs and two new lows, while the Nasdaq recorded 48 new highs and 11 new lows.
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