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* Target Corp sinks as Q1 profit halves
* Megacap growth stocks top drag on S&P 500, Nasdaq
* Indexes slump: Dow 2.56%, S&P 3.07%, Nasdaq 3.61% (Adds comment, details; updates prices)
By Amruta Khandekar and Devik Jain
May 18 (Reuters) - The Nasdaq and the S&P 500 dropped 3% on Wednesday as a rally in growth shares faded amid economic growth concerns, while Target plunged to the bottom of the S&P 500 after the retailer became the latest victim of surging prices.
Target Corp's first-quarter profit halved and the company warned of a bigger margin hit on rising fuel and freight costs. Its shares fell 25.2% and were tracking their worst day since the Black Monday crash on Oct. 19, 1987.
The retailer's results come a day after rival Walmart Inc trimmed its profit forecast. The SPDR S&P Retail ETF declined 8.2%.
All of the 11 major S&P sectors declined, with consumer discretionary and technology stocks down 5.7% and 3.5%, respectively.
Rising inflation, the conflict in Ukraine, prolonged supply chain snarls, pandemic-related lockdowns in China and prospects of aggressive policy tightening by central banks have weighed on the markets recently, stoking concerns about a global economic slowdown.
Wells Fargo Investment Institute on Wednesday adjusted its economic expectations to make a mild U.S. recession its base case for the end of 2022 and early 2023 based on economic data.
Federal Reserve Chair Jerome Powell vowed on Tuesday that the U.S central bank will raise rates as high as needed to kill a surge in inflation.
Traders are pricing in 50 basis point interest rate hikes by the Fed in June and July.
"A portion of the market is definitely focusing on a potential growth slowdown," said Zachary Hill, head of portfolio management at Horizon Investments.
"The Fed is dead set on tightening financial conditions and that means lower equity valuations and wider credit spreads."
The S&P 500 is down 16.8% so far in 2022 and the Nasdaq has fallen more than 26%, hit by growth stocks.
Valuations for stocks as measured by the forward price-to-earnings ratio have come down sharply in recent weeks and that has increased the appeal of shares for some investors.
"Until we have clarity (on Fed), the markets are going to continue to be volatile," Brooke May, managing partner at investment advisory firm Evans May Wealth said.
"But at this point, valuations are starting to look attractive and while it could go lower, these are pretty fair valuations, so hopefully we're getting close to a bottom."
Rate-sensitive Big Tech and growth companies such as Microsoft Corp, Apple Inc, Google owner-Alphabet Inc, Meta Platforms, Tesla Inc and Amazon.com fell between 3.5% and 6.0% after leading a sharp rebound in the previous session.
At 12:08 p.m. ET, the Dow Jones Industrial Average was down 836.46 points, or 2.56%, at 31,818.13, the S&P 500 was down 125.35 points, or 3.07%, at 3,963.50, and the Nasdaq Composite was down 432.54 points, or 3.61%, at 11,551.99.
The CBOE volatility index, also known as Wall Street's fear gauge, rose to 29.54 points, after falling for six straight sessions.
Declining issues outnumbered advancers for a 4.97-to-1 ratio on the NYSE and a 3.07-to-1 ratio on the Nasdaq.
The S&P index recorded one new 52-week high and 32 new lows, while the Nasdaq recorded 24 new highs and 129 new lows.
(Reporting by Amruta Khandekar and Devik Jain in Bengaluru; Editing by Shounak Dasgupta)