The Dow Jones industrial average had its second-biggest drop of the year, plunging almost 500 points, or 1.9 percent, shortly after 2:00 p.m.
USA market indexes continued their risk-off selling with all of the major indexes closing with losses.
This time around, strong economic data anxious bond investors, who sent the benchmark yield on Tuesday to 3.261 percent, the highest since early May 2011.
USA 10-year Treasuries, a closely-watched indicator of bond yields, hit a seven year high of 3.26pc on Wednesday.
The rise in U.S. Treasury yields has been bolstered by good U.S. economic data that has reinforced expectations of multiple rate hikes over the next 12 months by the Federal Reserve.
"The tax cuts juiced earnings this year and that's not sustainable", he said.
Stocks and bonds traditionally have been in a tug of war for capital, but for the past 10 years bonds have had one arm tied behind their back, said Jack Ablin, chief investment officer and founding partner at Cresset Wealth Advisors in Chicago.
The benchmark Dow index fell 831 points to close at 25,598.74 on Wednesday, wiping out 3.2 percent of its value in the sharpest drop since February. Amazon and Alphabet, respectively the second- and fourth-most valuable USA companies, are in what's known as a "correction", a drop of more than 10% from a recent peak. It's fallen 6.3 per cent over the last five days.
The Dow Jones Industrial Average fell 198.28 points, or 0.77 per cent, to 25,400.46.
Some of the big losers were stocks that have scored double-digits gains earlier in 2018.
The dollar index fell 0.17 percent, with the euro up 0.25 percent to $1.1518. Alphabet has dropped 15 percent since late July.
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Insurance companies dropped as Hurricane Michael continued to gather strength and came ashore in Florida bringing winds of up to 155 miles per hour. Berkshire Hathaway dipped 4.1 per cent to $214.64 and reinsurer Everest Re slid 4.6 per cent to $218.97.
Luxury stocks were another casualty of worries of slowing China demand, sparked by LVMH's results.
The Nasdaq fell 99 points, or 1.3 percent, to 7,322.
Bond prices rose. The yield on the 10-year Treasury fell to 3.17 percent. Chip gear producers Applied Materials, Teradyne and ASML Holdings fell between 3.5 percent and 4.6 percent. It has climbed 27.5 percent since Donald Trump was elected, and is still up 2.1 percent in 2018. Investors see many of these countries as being vulnerable to higher USA interest rates, which can pull away investment dollars. All this means that bonds, backed by the U.S. government, have become more attractive and thus many investors are turning to them as a risk-free investment.
United States stocks notched solid gains in the third quarter as investors brushed aside worries about trade wars and focused on strong corporate earnings and solid U.S. economic data.
October isn't even halfway over and its been the worst month in recent memory for semiconductor stocks especially.
Benchmark U.S. crude oil fell 2.4 per cent to $73.17 a barrel in NY. Brent crude, the worldwide standard, lost 2.2 percent to $83.09 a barrel in London.
The communication services sector also rose 0.49 percent on Thursday, with Facebook and Alphabet both rising 1.4 percent.
Wholesale gasoline lost 4.3 percent to $1.93 a gallon. The Japanese yen strengthened 0.53 percent versus the greenback at 112.36. Companies that sell non-essentials to consumers dropped 1.7 percent.
Investors may want to shift out of momentum and into more defensive stocks - companies that aren't as expensive and also pay healthy, stable dividends. Investors see many of these countries as being vulnerable to higher US interest rates, which can pull away investment dollars.
In health care, CVS sank 7.2 percent to $73.25 and Aetna sagged 2 percent to $199.37 after the New York Post said New York state regulators have concerns about CVS' purchase of the health insurer.