Stocks closed flat as the markets failed to sustain a minor afternoon rally.
"As volatility starts to pick up again, people have begun to realize that the probability of the Fed easing here is very, very low -- maybe even a better probability the Fed tightens here," said Richard Bernstein, chief investment strategist at Merrill Lynch. "The economy is turning out to be stronger than people have thought."
The Dow Jones Industrial Average ended flat, rising less than 1 point, the S&P 500 rose 0.1%, while the Nasdaq Composite closed with a tiny decline of 0.05%.
Some market pros remained optimistic on stocks despite recent declines sparked by higher bond yields.
"You can't time a two or three percent correction very well and we've seen the correction we were looking for," said Harry Clark, chief executive of Clark Capital Management. "We're buyers again."
Breadth deteriorated steadily throughout Monday's session. Decliners edged out advancers on the NYSE by a small margin. Four of the 10 economic sectors tracked by S&P closed higher, led by energy stocks such as Exxon Mobil, which gained on a rebound in crude oil prices. Bargain-hunting investors also snapped up shares of interest-rate sensitive utilities, which saw steep declines last week following a jump in bond yields.
Materials was one of the worst performing sectors, weighed down by a decline in steel stocks. Steelmaker Nucor said it expects second-quarter earnings to be well below Wall Street expectations due to softness in the automotive and residential construction sectors. The earnings warnings sent Nucor shares down and drove shares of steel companies lower.
Treasury prices edged lower, with the yield on the 10-year note remaining above 5.1%.
"You have to take into consideration that the market has shifted from looking at earnings to interest rates," said Peter Kenny, managing director at Knight Equity Markets. "Anytime the market looks so exclusively at one particular piece of data, it tends to overreact to that data."
Qwest Communications shares dropped 8% on news the telecom's chairman and chief executive Richard Notebaert will be retiring from the company to spend more time with his family.
For the first time in several weeks, Monday's headlines lacked a major merger announcement but speculative trading activity continued. Rupert Murdoch's News Corp. could have faced competition for its Dow Jones bid, as General Electric and Microsoft discussed making a rival offer for the news provider in recent weeks, according to the Wall Street Journal. The venture has since been abandoned, the paper said. (GE is the parent company of CNBC.)
Meanwhile, the board of Midwest Air Group has been given extra time to consider a hostile offer from AirTran, but Midwest said its long-term plan is better value for shareholders than the takeover offer of $15 a share. Midwest has until August 10.
Johnson & Johnson was upgraded to "neutral" from "underperform" by Credit Suisse.
And in the energy markets New York light sweet crude futurestraded above $65 a barrel. Iran's oil minister said OPEC has no plans to release more oil into the market ahead of its next policy meeting in September.
European Stocks Finish Higher
European stock markets rebounded higher Monday, following a negative week for the major bourses, as mergers and acquisitions took center stage.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX all closed to the upside.
On the M&A front, Barclays' bid for Dutch bank ABN Amro received a blow from the British bank's own shareholders as Atticus Capital, which owns a 1% stake in Barclays, warned it would vote against the proposed merger if it wasn't dropped. Shares in Barclays gained, while ABN's stock gained as well.
Also in the U.K., packaging group Rexam agreed to buy OI Plastic Products from Owens-Illinois for $1.83 billion and will help fund the deal with 58.35 million new shares. Rexam shares fell.
Meanwhile, French bank Société Générale is urgently seeking a takeover target to avoid becoming a target itself, according to a report from London newspaper The Times. Shares in the company gained.
And in political news, French President Nicolas Sarkozy's plans for reform gained a boost Sunday as his UMP party looked set to win at least 400 seats at the National Assembly, out of a possible 577. The results will be confirmed next Sunday at a second round of voting.
Asian Markets Mostly Higher
Asian markets were mostly stronger but off their highs following a rally on Wall Street. Japan finished with some gains but South Korea bucked the trend to finish down on profit taking.
Tokyo's Nikkei 225 Average closed slightly higher as Honda Motor and other exporters rose following gains in U.S. stocks, while Mitsui Sumitomo Insurance and its peers rose on expectations it would benefit from higher yields on government bonds. But investors held back ahead of a Bank of Japan policy meeting on Thursday and Friday.
South Korea's Kospi Index closed down for a second session with Doosan Heavy sliding after Goldman Sachs started coverage of the builder with a sell rating, while other recent shiners fell on worries valuations had grown too rich.
In markets still trading, China's Shanghai Composite Index rose sharply but pulled back from a high just below the 4,000 level, showing many investors were cautious about government policy and upcoming inflation data.
Hong Kong stocks rose tracking a rebound on Wall Street, as mainland shares such as China Unicom surged after telecoms network firm Ericsson signed a $1 billion deal with the parent of China Mobile.
Australia's markets were closed on Monday for a national holiday.