Stocks edged lower on Tuesday, with strong results from Home Depot, the world's largest home improvement company, countering fears about the "fiscal cliff," which investors see as a threat to economic growth.
Stocks opened lower but soon cut their losses sharply. Sectors tied to the pace of economic growth, including energy and banking, were among the weakest. Technology shares also were lower, pressured by weakness in Microsoft .
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Dow component Home Depot Inc was the top gainer on the S&P 500, climbing 4.4 percent to $63.86 after reporting earnings that beat expectations and raising its outlook. Rival retailer Lowes Companies also gained, up 1.8 percent to $32.57.
The fiscal cliff is a series of budget cuts and tax hikes that begin to take effect in the new year. Market participants worry that if no deal is reached to avoid going over the cliff, the economy could fall back into recession.
Concerns over this possibility contributed to the S&P's worst week since June last week, with no sign of a bottom despite a drop of almost 3 percent over the past two weeks.
"We're back to focusing on macroeconomic issues, with people trying to position themselves ahead of the fiscal cliff, especially with Europe still a threat," said Doug DePietro, head of trading at Evercore Partners in New York. "I don't feel like there's an underlying bid on the market."
U.S. lawmakers returned to Washington Tuesday with a seven-week deadline to reach agreement on the cliff, with most analysts expecting some kind of deal will be forged. But Barclays cut its year-end target for the S&P 500 to 1,325 from 1,395, saying there was "little basis to believe a grand compromise is in the offing."
Energy shares fell 0.3 percent, with Chevron Corp off 0.5 percent at $105.43 and Diamond Offshore losing 0.7 percent to $65.31. If economic growth were to stall because of the cliff, it could depress demand for oil and other commodities.
The Dow Jones industrial average was down 6.21 points, or 0.05 percent, at 12,808.87. The Standard & Poor's 500 Index was down 2.53 points, or 0.18 percent, at 1,377.50. The Nasdaq Composite Index was down 13.14 points, or 0.45 percent, at 2,891.12.
The Nasdaq was pressured by Microsoft, which dropped 3.5 percent to $27 on questions about the company's management. Steven Sinofsky, the executive most widely tipped to be Microsoft's next chief executive, left the software maker barely two weeks after launching Windows 8.
In other earnings news, AK Steel Holding Corp shares fell 10 percent to $4.91 after forecasting a fourth-quarter loss, while Michael Kors Holdings gained 3.9 percent to $52.58 after raising its outlook.
European shares <.FTEU3> fell 0.5 percent on gloomy German data and negative corporate news. In addition, Greece's international lenders didn't disburse the aid Greece had hoped to use to refinance 5 billion euros of its debt pile by Friday.
Morgan Stanley , which has a lot of exposure to Europe, fell 0.4 percent to $16.71 and pressured other financial companies.
(Editing by Kenneth Barry)