Sept 3 (Reuters) - Wall Street's main indexes fell over 1% on Tuesday as investors assessed subdued factory activity data ahead of a slew of labor market reports due through the week that could influence the extent of monetary policy easing by the Federal Reserve.
A gauge of U.S. manufacturing edged up in August from an eight-month low in July amid some improvement in employment, but the overall trend continued to point to lackluster factory activity.
The S&P 500 industrials sector (.SPLRCI), opens new tab fell more than 1.6% on Tuesday, with stocks such as Caterpillar (CAT.N), opens new tab and 3M (MMM.N), opens new tab weighing on the blue-chip Dow as well.
"The softer PMI surveys that were released this morning really accelerated a little bit of profit-taking that had played out," said Josh Jamner, investment strategy analyst at ClearBridge Investments.
"If we're rooting for a soft landing over recession, it's certainly not what we hoped to see. However, when it comes to a Fed rate cut cycle, Friday's employment data will be much more important."
The Nasdaq hit a three-week low, weighed down by rate-sensitive megacaps as markets enter into what has been a historically weak month for main indexes on average.
Megacaps, the forerunners of this year's rally, tumbled, with Nvidia (NVDA.O), opens new tab falling 7.3% and Microsoft (MSFT.O), opens new tab losing 1.2%, while a drop in chip stocks also dragged the Philadelphia SE Semiconductor index (.SOX), opens new tab down by 5.7%.
The broader tech sector (.SPLRCT), opens new tab that has jumped over 22% year-to-date led sectoral declines with a 3.3% drop.
At 12:01 p.m. the Dow Jones Industrial Average (.DJI), opens new tab fell 442.75 points, or 1.07%, to 41,120.33, the S&P 500 (.SPX), opens new tab lost 81.62 points, or 1.45%, to 5,566.78 and the Nasdaq Composite (.IXIC), opens new tab lost 432.02 points, or 2.44%, to 17,281.60.
Traders now await a number of labor market reports due through the week, ahead of Friday's non-farm payrolls data for August as focus remains on the labor market after July's report hinted at a greater-than-expected slowdown and sparked a global stock selloff in early August.
The U.S. central bank's meeting later in the month will be closely observed following Chair Jerome Powell's recent support for forthcoming policy adjustment.
Odds of a 25-basis point interest rate cut are at 63%, according to the CME Group's FedWatch Tool, while those for a bigger 50 bps reduction are at 37%.
Seven of the 11 S&P 500 sectors traded lower. However, defensives such as consumer staples (.SPLRCS), opens new tab, healthcare (.SPLRHC), opens new tab and utilities (.SPLRCU), opens new tab saw marginal gains.
Wall Street's fear gauge, the CBOE Volatility Index (.VIX), opens new tab, touched an over one-week high and was last up 2.51 points at 18.04.
Among others, Tesla (TSLA.O), opens new tab added 0.6% after a report said it plans to produce a six-seat variant of its Model Y car in China from late 2025.
Boeing (BA.N), opens new tab lost 8.1% after Wells Fargo downgraded the planemaker's shares to "underweight" from "equal weight".
Declining issues outnumbered advancers by a 2.2-to-1 ratio on the NYSE and by a 3.22-to-1 ratio on the Nasdaq.
The S&P 500 posted 80 new 52-week highs and five new lows, while the Nasdaq Composite recorded 47 new highs and 101 new lows.
Reporting by Johann M Cherian and Purvi Agarwal in Bengaluru; Editing by Shounak Dasgupta and Maju Samuel
