"It's been a relatively positive year for the equity market and so at this point, it's probably less enticing for investors to take additional risks and more attractive to lock in some gains," said Natalie Trunow, CIO of equities at Calvert Investments. "That's why it's going to be difficult to see a great deal of further upward move in the equity market unless we see a positive resolution of the fiscal cliff…There's a lot of room for disappointment for investors."
Headlines over the negotiations have dominated market action in the recent weeks. Analysts say a deal before the year-end could trigger a rally.
President Barack Obama said there is not enough time this year to come up with a full overhaul of the U.S. tax system and entitlement programs as Republicans want as a condition for an agreement to avoid the fiscal cliff. (Read More: Going Off 'Cliff' Would Help Wall Street: Gov. Dean)
"Let's essentially put a down payment on taxes, let's let the tax rate on the upper-income folks go up," he said on Bloomberg Television. "And then let's set up a process with a time certain, at the end of 2013 or the fall of 2013, where we work on tax reform, we look at what loopholes and deduction both Democrats and Republicans are willing to close, and it's possible that we may be able to lower rates by broadening the base at that point."
On Monday, the White House rejected a deficit reduction proposal made by House Republicans, which called for $800 billion in revenues through tax reforms and $600 billion in health savings among other offers. (Read More: 'Fiscal Cliff' Impact Could Stretch in 2014: BofA CEO)
Investors will be looking ahead to the government's monthly non-farm payrolls data due at the end of the week. Economists expect a gain of 100,000 in November and the unemployment rate to stay unchanged at 7.9 percent, according to a Reuters poll. Still, some economists believe the report could be much weaker, due to the aftermath of Hurricane Sandy.
Campbell Soup became the latest major company to declare a special dividend. So far, nearly 100 companies with a market cap over $240 million have announced special dividends, valued at almost $23 billion have been announced in the fourth quarter, ahead of next year's possible tax increase on dividends.
Netflix surged after Walt Disney agreed to give the online movie-streaming company exclusive TV distribution rights to its movies. The agreement begins in 2016, after Disney's current deal with Liberty Media's pay-TV channel Starz expires.
Facebook unveiled a mobile messenger app in an aim to grow its user base and mobile revenue. Starting Tuesday, anyone with a mobile phone can sign up for Facebook Messenger, using just a name and phone number.
Autozone posted earnings that edged past expectations by two cents a share, but shares of the largest U.S. auto parts retail chain slipped as revenue fell slightly short of expectations.
Big Lots jumped after the retailer posted a narrower-than-expected loss and boosted its full-year forecast to above estimates.
Toll Brothers reversed earlier losses to end lower even after the luxury homebuilder reported earnings that beat expectations and said new orders rose sharply.
Pandora and Mattress Firm are among companies scheduled to post earnings after the closing bell.
Agribusiness giant Archer Daniels Midland raised its bid for Australian grains handler GrainCorp to $2.9 billion and bought more shares of the company.
Baxter International edged lower after the medical device maker said it will acquire Swedish company Gambro in a deal worth $2.76 billion to broaden its dialysis product portfolio.
European shares closed mixed, but losses were limited amid a meeting between European finance ministers, in which proposals for a single bank supervisor are expected to be discussed.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
Coming Up This Week:
WEDNESDAY: Weekly mortgage apps, ADP employment report, productivity & costs, factory orders, ISM non-mfg index, oil inventories; Earnings from Men's Warehouse
THURSDAY: BoE announcement, Challenger job-cut report, ECB announcement, jobless claims, quarterly services survey, Apple/Samsung hearing; Earnings from H&R Block, Lululemon, Smithfield Foods, Cooper Cos.
FRIDAY: Employment situation, consumer sentiment, consumer credit
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