Stocks slump amid global growth fears

Updated at 4:05 p.m. ET:  Stocks pared an early advance and closed sharply lower Tuesday as a pessimistic outlook from multinational manufacturer Caterpillar overcame hopes the boost from central banks' stimulus will sustain economic growth and markets.

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The Dow Jones industrial average closed the day down 101 points and saw its worst day this month. The broader S&P 500 index saw its worst day in three months.

Just minutes before markets closed on Monday, Caterpillar Inc cut its 2015 profit outlook, warning that weaker commodity prices would result in a bigger-than-expected decline in demand, sending its shares down.

The news follows lowered forecasts by transportation companies FedEx Corp and Norfolk Southern.

"Caterpillar is another global-reaching firm that's speaking negatively to the pace of the economy, and with slowdowns in Europe and Asia this is something we should get used to," said Art Hogan, managing director of Lazard Capital Markets in New York.

Also a worry for traders in the final hour of trading: Television images of protesters clashing with police in Spain's capital as the government prepares a new round of unpopular austerity measures for the 2013 budget that will be announced on Thursday.

In economic news, U.S. single-family home prices rose for a sixth month in a row in July, though the improvement was not as strong as expected, a closely watched survey showed.

Another report showed consumer confidence jumped to its highest level in seven months in September as Americans were more optimistic about the job market and income prospects.

Equities have rallied in recent months on expectations of stimulus from central banks around the world, and announcements of easing earlier this month from the Federal Reserve and European Central Bank have kept the S&P 500 near multiyear highs.

San Francisco Fed President John Williams said on Monday he expected the central bank to expand its bond-buying program next year to more aggressively combat the unemployment rate. He also expects the program to end before the close of 2014.

"Monetary policy has been enough to offset a lot of what we've been worried about lately," Hogan said. "It is acting as a backstop for corporate warnings and Europe fears and keeping us higher in a historically weak month."

The S&P 500 is on track for a solid gain for the quarter, a rally largely tied to central banks' actions to stimulate their economies. After those gains, many market participants are looking for new catalysts to keep pushing shares higher.

U.S. stocks closed flat on Monday as an index of German business sentiment declined for a fifth consecutive month in September, showing Europe's strongest economy was moving closer toward recession as the euro zone's debt crisis remains unresolved. Caterpillar's outlook further pressured sentiment going into the close.

Reuters contributed to this report.