The decline of large technology companies, which have been the big winners in the market's record rally, affected the market. Apple fell 1.6%, Microsoft lost 1.3% and Meta Platforms closed down 3%.
The late-afternoon burst of selling may reflect traders taking profits, with the market near record highs, or rebalancing their portfolios as the second quarter draws to a close, said Ross Mayfield, an investment strategy analyst at Baird.
"I wouldn't be surprised at all if there was some profit taking today, especially from the names that have really rallied," Mayfield said. "That might be why we're seeing a little bit of additional weakness from Big Tech versus the rest of the market."
The market initially rose after a closely watched report showing inflation continues to decline. Investors hope that cooling inflation will prompt the Federal Reserve to begin cutting interest rates, which remain at their highest level in more than 20 years.
Consumer prices rose 2.6% in May compared to a year earlier, according to the latest personal consumption expenditure index, or PCE. That indicated a continued decline from a reading of 2.7% in April and is well below the peak reading of 7.1% two years ago.
"It's moving in the right direction and this is what the Fed needs to make a decision to cut rates," said Quincy Krosby, chief global strategist at LPL Financial.
The PCE is the Fed's preferred measure of inflation and the latest reading is encouraging for economists and investors who hope rate cuts will help ease pressure on the market and borrowers. Wall Street is betting the Fed will begin cutting interest rates at its September meeting.
Treasury yields rose in the bond market after initially losing ground following the latest sign of slowing inflation. The yield on the 10-year Treasury note, which influences interest rates on mortgages and other consumer loans, rose to 4.38% from 4.30% just before the release of the PCE data. The yield on the two-year Treasury note, which more closely tracks expectations for Fed actions, rose to 4.74% from 4.72% just before the release of the data.
The Federal Reserve raised interest rates to their highest level in more than two decades in an effort to control inflation and return it to its 2% target. Other inflation measures, including the well-known consumer price index, have also confirmed that price pressure has been easing.
Consumers continue to feel the pressure of inflation, despite the significant decline from its peak, and recent data has shown that spending is weakening and weighing on economic growth. The Federal Reserve's goal was to slow economic growth enough to cool inflation, but not so much that the economy would enter a recession.
"This combination of falling inflation and consumers being much more careful with spending patterns allows the market to see the possibility of a rate cut in September," Krosby said.
The strong labor market has been another important factor driving economic growth, but it has also shown signs of weakening. Wall Street will get updates on job openings, unemployment and hiring next week.
Nike fell 20% in the biggest drop among S&P 500 stocks after the sports footwear and apparel company missed Wall Street's revenue targets and cut its full-year sales guidance. Company executives said they expect sales to decline by single digits in the current fiscal year, citing a "challenging" environment.
Nike's dour outlook dragged down other sports apparel companies. Foot Locker fell 2.4%, Skechers lost 1% and Under Armour dropped 2.6%.
More retailers, especially those focusing on discretionary items, have been warning of a slowdown in consumer spending. Consumers barely increased their spending in May compared with April, according to the government's latest retail sales report.
Gains in financial stocks helped limit the S&P 500's decline. JPMorgan Chase rose 1.6% and Wells Fargo closed 3.4% higher.
The S&P 500 closed its final trading day of June with a 3.5% gain for the month. The index is up about 14.5% so far this year.
The Nasdaq gained about 6% for the month and is up 18.1% this year.
Overall, the S&P 500 fell 22.39 points to close at 5,460.48. The Dow Jones fell 45.20 points to close at 39,118.86. The Nasdaq fell 126.08 points to close at 17,732.60.
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AP Business writers Yuri Kageyama and Matt Ott contributed to this report.
