Stocks recovered from earlier losses to close near the unchanged mark as investors took positions ahead of tomorrow's Fed meeting.
"Investors are basically still cautious despite this big run and although we're very overbought, I think the fact that we could get this overbought is bullish in itself," said Bruce Bittles, chief investment strategist at Robert W. Baird.
The Dow Jones Industrial Average, the S&P 500 and the Nasdaq ended flat, but the major indexes nearly erased early declines primarily attributed to profit-taking.
"It's pre-FOMC meeting jitters, and traders are taking positions," said Marc Pado, chief market strategist at Cantor Fitzgerald. "We've come a long way pretty quickly in the short term. This meeting is really important in terms of the news stream for the next month."
The Fed is widely expected to leave rates unchanged at 5.25%, but the central bank's comments on the state of the economy and inflation could have an impact on market direction.
"Now that investors have digested the fact that earnings are not falling off a cliff and the economy is not grinding to a halt, the next step is to get into a macro view of the economy through the Fed," said Michael Cuggino, president of Permanent Portfolio Funds.
Breadth was negative with decliners outpacing advancing stocks by about a three-to-two margin on the NYSE. The energy and technology sectors were the day's only winners among the 10 S&P 500 sectors.
Hewlett-Packard raised its second-quarter outlook and issued upside guidance for the third quarter, sending shares up 2%. HP said it was prompted to issue the update following an inadvertent disclosure of financial information to a single outside party.
Canadian publisher Thomson in talks to buy Reuters Group for about $17.6 billion in a cash-and-stock deal which would create the world's largest financial news and data company, the companies said on Tuesday. Based on Monday's close, the deal values Reuters at about $14 a share, a 13% premium from Reuters' closing price.
Shares of AK Steel jumped more than 10% on Tuesday after the Financial Times said Arcelor Mittal could bid as much as $40 a share for the U.S. steelmaker.
Alcoa saw shares jump 2.5% late in Tuesday's session after shareholder JANA Partners asked the company's board to drop efforts to buy Canadian peer Alcan and instead consider other alternatives, including a sale of the company. On Monday, Alcoa launched a hostile bid for Alcan worth nearly $27 billion after talks between the two aluminum producers failed to lead to a deal.
In other earnings news, shares of Expedia closed down 3% after the online travel agency reported quarterly earnings short of analysts' expectations. Goldman Sachs reiterated a "neutral" rating on the stock.
"While we believe Expedia's first-quarter results are encouraging and provide an incrementally more positive bias, we do not anticipate a significant change to our long-term growth outlook for the company," wrote analyst Anthony Noto in a client report.
Internet marketing firm aQuantive shares rose more than 11% after the company reported earnings of 16 cents a share, topping Wall Street's forecast of 9 cents.
Shares of McDermott International, a U.S. engineering and construction firm, gained 10% after first-quarter earnings came in above Street expectations.
The National Association of Realtors lowered 2007 forecasts, saying existing homes sales will probably fall about 3% this year to 6.29 million, while new homes sales and housing starts could decline 18% and 19%, respectively. Meanwhile, March wholesale inventories came in lower than expected, rising 0.3%.
Treasury prices edged higher, pushing yields down slightly.
Light sweet crude futures closed up 1.3% to $62.26.
European Stocks Fall, Asia Mostly Lower
European shares declined as investors took profit following strong gains sparked by solid first-quarter earnings and last week's deal-inspired advance.
Germany's DAX fell 1.2%, while the Paris CAC-40 and Britain's FTSE each fell more than 0.7%.
In Germany, Deutsche Bank reported a boom in trading that helped the financial company report first-quarter results above expectations. Drugmaker Bayer also reported strong first-quarter results due to strong sales of multiple sclerosis treatment Betaseron.
Asian markets closed mostly lower as nervous investors worried whether a global rally would run out of steam. Chinese stocks surged, however, following a weeklong holiday.
The Nikkei 225 Average closed little changed as investors took profits in Kyocera and other recent gainers after the benchmark ended the previous session at its highest in more than three weeks. But bank shares advanced after ratings agency Moody's upgraded Japanese banks.
In South Korea, the Kospi Index ended a touch lower to mark their first decline in five sessions, as concerns that the recent record-setting rally might have been overdone kicked in, but brisk earnings boosted Hyundai Heavy Industries.
China's main stock index surged nearly 3% and set a fresh all-time high, buoyed by strong buying in sectors including real estate and retailing, as trade resumed after a week-long public holiday.