By Noel Randewich and Shristi Achar A
(Reuters) - U.S. stocks ended lower on Monday, interrupting last week's rally, as investors turned cautious ahead of employment data due this week that could alter expectations that the Federal Reserve will cut interest rates early next year.
The S&P 500 receded, with megacaps Microsoft, Apple, Nvidia and Amazon dipping over 1%, pressured by higher U.S. Treasury yields, which made returns on stocks less attractive.
The S&P 500 registered its highest close of the year on Friday as remarks from Fed Chair Jerome Powell acknowledged the central bank's need to "move forward carefully" amid signs of economic softening, comments that bolstered expectations the Fed has finished raising rates.
Small-cap stocks rose on Monday, with the Russell 2000 rallying about 1% and bringing its gain this year to almost 7%.
"There is a lot of chop around here that is not necessarily meaningful," said Tom Martin, a senior portfolio manager at GLOBALT Investments in Atlanta.
"We have a really important Fed meeting coming up, and what makes it important is that all of a sudden, the market has decided that they're going to cut early next year."
The S&P 500 declined 0.54% to end the session at 4,569.78 points.
The Nasdaq declined 0.84% to 14,185.49 points, while Dow Jones Industrial Average declined 0.11% to 36,204.44 points.
Volume on U.S. exchanges was relatively heavy, with 12.7 billion shares traded, compared to an average of 10.6 billion shares over the previous 20 sessions.
Ride-hailing service Uber Technologies rallied 2.2% after an announcement on Friday it will join the S&P 500 effective Dec. 18.
Shares of Alaska Air Group tumbled 14% after the carrier said on Sunday it would acquire peer Hawaiian Holdings for $1.9 billion, including debt. Hawaiian's shares nearly tripled in value, helping lift the Russel index.
This week's main macroeconomic focus will be Friday's jobs report for November, which may help investors gauge the Fed's likely interest rate path, as well as the potential for a "soft landing" - where the Fed manages to bring inflation under control while averting a recession.
Traders widely expect the central bank will keep rates unchanged at its meeting next week. Interest rate futures suggest a 58% probability the Fed will start cutting rates by March 2024, according to the CME Group's FedWatch tool.
However, some analysts warn that markets have been too quick to price in lower interest rates.
Adding to declines on Monday were renewed fears about a widening of the war in Israel and Gaza after an attack on three commercial vessels in the southern Red Sea.
Shares of cryptocurrency firms such as Coinbase Global, Riot Platforms and Marathon Digital rallied between 5% and 9% after bitcoin crossed $40,000 for the first time this year.
Advancing issues outnumbered falling ones within the S&P 500 by a 1.0-to-one ratio.
The S&P 500 posted 38 new highs and no new lows; the Nasdaq recorded 125 new highs and 63 new lows.
The S&P 500 has gained 19% so far in 2023, while the Nasdaq has recovered 24%.
(Reporting by Amruta Khandekar and Shristi Achar A in Bangalore, and by Noel Randewich in Oakland, Calif.; Editing by Anil D'Silva, Pooja Desai and Aurora Ellis)