"While the S&P 500's 3.7 percent gain through September 25 leaves it on pace to far exceed its average 0.6 percent September decline since 1945, stocks have succumbed to mild profit taking as the month winds down with the index off slightly from its recent closing high of 1,724," wrote Alec Young, global equity strategist at S&P Capital IQ. "Driving the caution are the usual suspects – the Fed and Washington's fiscal wrangling."
On the economic front, the government left its estimate for economic growth in the second quarter unchanged at 2.5 percent, according to the Commerce Department.
"Today's GDP report clarifies many Wall Street uncertainties. For one, the 2.5 percent print validates the 'no-change' decision in QE," said Todd Schoenberger, managing partner at LandColt Capital. "Second, it's obvious with a looming government shutdown and a drop in household discretionary incomes due to implementation of the Affordable Care Act, the upcoming quarter will be significantly lower. Thus, forcing the hand of the Fed to maintain status quo in regards to its current monetary policy for the foreseeable future."
And weekly jobless claims fell 5,000 last week to a seasonally adjusted 305,000, according to the Labor Department. The four-week average of new claims fell 7,000 to 308,000, the lowest level since June 2007.
Pending home sales slipped 1.6 percent in August, declining for the third-straight month, according to the National Association of Realtors.
Budget spending must be agreed by Congress before October 1, next Tuesday, to prevent a government shutdown which could involve federal employees facing unpaid temporary leave and a delay in the payment of military personnel. Most analysts expect a deal to be reached, even if it is at the last minute, since lawmakers are unlikely to want to risk any fallout at the 2014 Congressional elections.
(Read more: Brawl in US Congress – should the world care?)
Meanwhile, the debt ceiling must be extended until later in October to allow the Treasury to continue borrowing money and honor its debt repayments.
"While a last-minute deal that avoids a default is likely by mid-November, the process is likely to be hugely contentious and protracted, maximizing headline risk," wrote Young. "That said, we don't see Washington's antics driving more than knee-jerk, short-term sell-offs similar to the fiscal cliff drama late last year. Ironically, we actually expect easing fiscal drag to be a major driver accelerating growth into 2014 as government spending stabilizes."