By Lewis Krauskopf
(Reuters) - The Nasdaq posted its biggest one-day drop in more than three months on Wednesday as investors fled high-flying technology stocks and shifted to banks and other pockets of the market that could benefit from improving economic conditions, lower regulations and taxes as well as higher interest rates.
Gains in financial, industrial and healthcare stocks boosted the Dow industrials, giving the blue-chip index another record closing high, and they helped the benchmark S&P 500 index finish near flat.
The S&P tech sector <.SPLRCT>, which has propelled the market's record-setting rally this year, shed 2.6 percent for its biggest daily decline in over five months.
Shares of Amazon.com <AMZN.O>, Apple <AAPL.O>, Google parent Alphabet <GOOGL.O> and Facebook <FB.O> fell between 2 percent and 4 percent. Among the year's other high fliers, Netflix <NFLX.O> slid 5.5 percent and the Philadelphia semiconductor index <.SOX> dropped 4.4 percent.
Financials <.SPSY> rose 1.8 percent, adding to Tuesday's gains and resulting in their biggest two-day rise since just after the 2016 U.S. election of President Donald Trump. JP Morgan <JPM.N> rose 2.3 percent and Wells Fargo <WFC.N> climbed 2.0 percent.
The industrial sector <.SPLRCI> added 0.9 percent, led by transportation stocks such as Southwest Airlines <LUV.N>, railroad Union Pacific <UNP.N> and package delivery company UPS <UPS.N>.
"We are certainly seeing a change in leadership at least for today in that we are taking profits from technology and redistributing those profits to areas that will benefit from lower taxes, less regulation, higher interest rates and kind of later stages of the economic cycle," said Michael Arone, chief investment strategist at State Street Global Advisors in Boston.
The Dow Jones Industrial Average <.DJI> rose 103.97 points, or 0.44 percent, to 23,940.68, the S&P 500 <.SPX> lost 0.97 point, or 0.04 percent, to 2,626.07 and the Nasdaq Composite <.IXIC> dropped 88.02 points, or 1.27 percent, to 6,824.34.
While Amazon dropped, shares of other retailers posted sharp gains, including Target <TGT.N> up 8.9 percent and Macy's <M.N> up 8.2 percent, as holiday shopping season has begun in earnest over the past week.
"There may be a little bit of a thought that Amazon isn't going to kill every retailer out there," said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.
"We’re seeing some transportation stocks doing better in expectation that maybe this is going to be a pretty good holiday season with consumer confidence doing well and wage growth picking up a little bit,” Nolte said.
Investors are keenly focused on tax-reform legislation in Congress, with hopes that a corporate tax cut would further fuel the record-setting rally in equities.
Congressional Republicans scrambled to reformulate their bill to satisfy lawmakers worried about how much it would expand the federal deficit, as the measure moved toward a U.S. Senate floor vote later this week.
In the latest batch of encouraging economic data, the U.S. economy grew faster than initially thought in the third quarter, notching its quickest pace of expansion in three years.
Outgoing Federal Reserve Chair Janet Yellen told congressional leaders the U.S. economy has gathered steam this year and will warrant continued interest rate increases amid a strengthened global recovery
It was Yellen's final scheduled testimony on Capitol Hill. Her nominated replacement, Jerome Powell, on Tuesday had defended plans to potentially lighten regulation of the financial sector.
In corporate news, Chipotle Mexican Grill <CMG.N> shares rose 5.6 percent after the restaurant chain said it was seeking a turnaround expert to lead the company.
About 8 billion shares changed hands in U.S. exchanges, well above the daily average of roughly 6.5 billion over the last 20 sessions.
(Additional reporting by Sruthi Shankar and Rama Venkat Raman in Bengaluru; editing by Nick Zieminski and G Crosse)