By Dan Strumpf 

U.S. stocks fell on Wednesday after Federal Reserve Chairwoman Janet Yellen drew attention to elevated valuations in the equity market.

Ms. Yellen made the remarks in a conversation with International Monetary Fund Managing Director Christine Lagarde, who asked the central bank chief about the possibility that the Fed's rock-bottom interest-rate policy was leading to bubbles in financial markets.

The Dow Jones Industrial Average fell 86.22 points, or 0.5%, to 17841.98, while the S&P 500 index shed 9.31 points, or 0.45%, to 2080.15. The Nasdaq Composite Index declined 19.68 points, or 0.4%, to 4919.64.

The declines capped a volatile session for stocks, which rose at the opening bell, then reversed course within the first half hour of trading. The losses snowballed following Ms. Yellen's remarks, with the Dow falling as much as 195 points, before paring losses.

"Risks to financial stability are moderated, not elevated at this point, " Ms. Yellen said, though she added that stock-market valuations appear "quite high" and some bond and loan markets suggest investors may be taking excess risks.

Investors seized on the warning, which comes amid a recent spate of negative economic headlines and one of the weakest quarterly earnings seasons in several years. Trading volumes were elevated, with more than 7 billion shares trading hands.

"You came in hoping for a reason to buy stocks, and the market hasn't given us that for a while," said Larry Weiss, head of trading at brokerage Instinet in New York. "When something comes out [from the central bank] that's unscripted, or surprises people, people definitely use it as an excuse" to trade.

The comments weren't the first time Ms. Yellen has raised concerns about the risks of high valuations in the stock market. Last July, in a biannual report to Congress, the central bank sounded alarm about lofty prices of social-media and biotechnology stocks, prompting a short-lived pullback in those sectors.

Wednesday's pullback marked the second consecutive day of losses for major stock benchmarks, the latest move in a sideways year for stocks. The Dow is up just 0.1% for the year, and has fallen 2.4% from its last record close reached in early April. The S&P 500 is up 1% for the year, but down 1.8% from its late-April record.

Above-average stock valuations have for years been a concern for investors as the bull-market in equities enters its sixth year. The S&P 500 index now trades at 17.5 times the last 12 months of earnings, according to FactSet. The 10-year average P/E ratio for the index is 15.8.

Ms. Yellen's latest warning over valuations is the latest cause for hand-wringing by investors, following a raft of data suggesting the U.S. has entered an economic rough patch. Last week, the Commerce Department said gross domestic product grew at a paltry 0.2% pace in the first quarter, while the country's trade deficit widened.

At the same time, earnings growth all but stalled in the first quarter. With 417 companies reporting first-quarter results, earnings among companies in the S&P 500 are on pace to grow just 0.2%, according to FactSet. Still, that's better than the forecast for a 4.7% decline in earnings at the end of March.

On Friday, the federal government is due to release its closely watched jobs report for April. Economists expect the Labor Department to report that 228,000 jobs were added last month, up from 126,000 jobs added in March. The unemployment rate is expected to fall to 5.4% from 5.5%.

Energy stocks shed their early gains as oil prices pulled back from a sharp advance. Shares of energy companies in the S&P 500 fell 0.3%. U.S. oil prices gained 0.9% to $60.93 a barrel after data showed U.S. oil stockpiles finally declined last week for the first time in 16 weeks.

A monthslong recovery in oil prices has prompted a big rebound in shares of energy companies. The S&P 500 Energy Index is 3% higher in the last month, compared with near-flat performance for the S&P 500.

"Oil prices have shot up pretty quickly," said David O'Malley, chief executive of Penn Mutual Asset Management, which has $20 billion under management. "This increase back to $60 a barrel alleviates some of the fears" about what low oil prices could mean for the fracking industry and more levered energy companies, he added.

The yield on the 10-year Treasury note rose to 2.236% as prices fell.

European stocks were mixed Wednesday. Germany's DAX index gained 0.2% and France's CAC 40 rose 0.2%. The Stoxx Europe 600 index declined 0.6%.

Meanwhile, investors received a disappointing report Wednesday on private-sector employment. Private payrolls in the U.S. increased by 169,000 in April, according to a report compiled by payroll processor Automatic Data Processing Inc. and forecasting firm Moody's Analytics. Economists surveyed by The Wall Street Journal had expected an increase of 205,000 jobs.

First-quarter earnings reports prompted some moves by individual stocks. Chesapeake Energy Corp. said Wednesday it had swung to a loss in the first quarter as the shale driller took a $3.6 billion write-down. Excluding the impairment and other special charges, profit came in above expectations. Shares fell 7.2%.

Mylan NV said Tuesday its revenue rose a less-than-expected 9%, as foreign currency and acquisition costs weighed on results. The company affirmed its full-year outlook. Shares fell 2.5%.

Alexion Pharmaceuticals Inc. has agreed to buy Synageva BioPharma Corp. in a cash-and-stock deal valued at $8.4 billion. Alexion shares fell 8%, while those of Synageva surged 112%.

Write to Dan Strumpf at daniel.strumpf@wsj.com

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