By Chuck Mikolajczak
NEW YORK (Reuters) -U.S. stocks closed nearly unchanged on Tuesday, giving up earlier gains that had vaulted the S&P 500 and Dow Industrial Average to record highs as investors braced for the first Federal Reserve rate cut in 4-1/2 years.
The benchmark S&P 500 index touched 5,670.81 earlier in the session, after fresh economic data eased worries of a sharp slowdown in the U.S. economy.
The latest report from the U.S. Commerce Department showed retail sales rose unexpectedly in August, after a decline in auto dealership receipts was offset by strength in online purchases, suggesting the economy was on solid footing through most of the third quarter.
"Expectations were pretty well entrenched before calling into today's economic data and what they showed was generally a growth environment, but a relatively slow-growth environment," said Russell Price, chief economist at Ameriprise Financial (NYSE:AMP) Services in Troy, Michigan.
Price said the size of the cut could either stoke inflation fears or increase worries the Fed is moving too slowly to avoid a recession.
"What you're seeing in this afternoon's trading is the way we pulled off of the all-time high ... because tomorrow somebody's going to be disappointed," he said.
The Dow Jones Industrial Average fell 15.90 points, or 0.04%, to 41,606.18, the S&P 500 gained 1.49 points, or 0.03%, to 5,634.58 and the Nasdaq Composite gained 35.93 points, or 0.20%, to 17,628.06.
Markets are pricing in a 65% chance the Fed will cut borrowing costs by 50 basis points at the conclusion of its two-day meeting on Wednesday, according to the CME's FedWatch Tool. Market expectations on the cut's size have been volatile in recent days, with only a 34% chance of a 50-bps cut priced in as of last week.
Microsoft (NASDAQ:MSFT), up 0.88%, was the biggest lift to the S&P 500, as shares rose after the AI frontrunner's board approved a new $60-billion share-buyback program and hiked its quarterly dividend by 10%.
The blue-chip Dow hit a record intraday high for a second-straight day. The Russell 2000 index tracking small caps, which investors view as likely to benefit from a lower rate environment, outperformed the three major indexes, climbing 0.74% on the session.
Energy, up 1.41%, was the best-performing of the 11 major S&P sectors, buoyed by a climb in crude prices, while healthcare was the worst-performing with a decline of 1.01%.
Among other movers, Intel (NASDAQ:INTC) gained 2.68% after signing Amazon.com (NASDAQ:AMZN)'s cloud-services unit as a customer to make custom artificial-intelligence chips. Amazon.com shares advanced 1.08%.
Advancing issues outnumbered decliners by a 1.55-to-1 ratio on the NYSE and on the Nasdaq, advancing issues outnumbered decliners by a 1.25-to-1 ratio.
The S&P 500 posted 48 new 52-week highs and no new lows while the Nasdaq Composite recorded 147 new highs and 68 new lows.
Volume on U.S. exchanges was 10.23 billion shares, compared with the 10.74-billion average for the full session over the last 20 trading days.