Stocks fell on Tuesday as investors braced for what is expected to be another dismal earnings season and fresh worries surfaced over the amount of toxic assets on bank balance sheets.

Bank shares declined after it was reported the International Monetary Fund was set to forecast toxic assets on the balance sheets of financial corporations could reach $4 trillion.

Jitters regarding financial companies have resurfaced as investors also gird themselves for a weak round of earnings, starting with Alcoa Inc after the close today. Alcoa shares fell 3.7 percent to $7.61 ahead of the release of their results.

Earnings for S&P 500 companies are expected to fall by 36.7 percent, according to Thomson Reuters data.

The slide in bank shares comes after stocks rallied off 12-year lows in the last month, fueled in part by reassuring comments from major banks about their performance in the beginning of the year. The KBW Bank <.BKX> index shed 1.5 percent.

People are scaling back their exposure to equities in front of earnings season, said Dan Greenhaus, equity strategist at Miller Tabak & Co in New York.

We've had a very nice run-up here and I think at this stage of the game with earnings season looming and a lot of uncertainty on that front people are scaling back their exposure in preparation of what might be a choppy earnings season.

The Dow Jones industrial average <.DJI> dropped 157.62 points, or 1.98 percent, to 7,818.23. The Standard & Poor's 500 Index <.SPX> dropped 15.34 points, or 1.84 percent, to 820.14. The Nasdaq Composite Index <.IXIC> dropped 26.01 points, or 1.62 percent, to 1,580.70.

Energy stocks Chevron and Exxon Mobil were among the top drags on the Dow as U.S. crude oil futures fell below $50 a barrel on a stronger dollar and caution ahead of inventory data.

Chevron fell 2.1 percent to $68.40 while Exxon Mobil dropped 2.6 percent to $68.24.

Microsoft, which rose 1.3 percent to $19.01, was the top performer on both the Dow and Nasdaq 100 after RBC Capital Markets upgraded the company to outperform from sector perform along with seven other software companies, citing more reasonable valuations and a decreased risk to negative earnings revisions.

Also on the research front, Citigroup upgraded American Express to a hold from a sell on a more balanced risk to reward basis. Shares fell 0.07 percent to $15.06.

In a separate note, the firm said that it had downgraded the United States equities market to underweight, as the firm prefers to increase exposure to the European and Asian markets as they expect them to perform better.

Despite recent declines, the S&P 500 is up more than 21 percent since hitting a bear market closing low on March 9, as hopes rose the economic slump is moderating and banks are stabilizing as policy-makers continue an aggressive campaign to shore up the system.

(Additional Reporting by Ellis Mnyandu)

(Reporting by Chuck Mikolajczak; Editing by Theodore d'Afflisio)