Wall Street drops as cyclicals and small-cap shares weigh

NEW YORK (Reuters) - U.S. stocks fell on Monday, pulling back from record levels as investors held off from making big plays before the start of earnings season.

Cyclical stocks, which are tied to the pace of economic growth, were among the weakest of the day, with the S&P industrial sector index down 0.5 percent. The only sectors in positive territory were defensive groups like utilities and telecom.

Small-cap stocks also underperformed for the day, with the S&P Small-Cap 600 index down 1.2 percent. The Russell 2000 .TOY fell 1.4 percent.

Wall Street hit a number of milestones on Thursday, the final trading session before the Independence Day holiday, with the Dow topping 17,000 for the first time and the S&P 500 closing at a record high after a strong June jobs report.

While the market's uptrend is still viewed as intact, trading may be light with few major catalysts on deck. Action may pick up later this week with the release of quarterly results from Alcoa Inc AA.N and Wells Fargo & Co WFC.N.

"This earnings season has a lot of pressure on it since we need to see significant revenue growth to offset weakness in the first quarter," said Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, New York. "There are still areas of the market that are overvalued, especially in the small-cap space."

Dozens of major companies are scheduled to report next week, including numerous Dow components. Profits are forecast to grow 6.2 percent for the quarter, according to Thomson Reuters data, but investors see a slight chance that profits could return to double-digit growth for the first time in nearly three years.

The Dow Jones industrial average fell 50.42 points or 0.3 percent, to 17,017.84. The S&P 500 lost 8.06 points or 0.41 percent, to 1,977.38. The Nasdaq Composite dropped 28.59 points or 0.64 percent, to 4,457.33.

Wall Street has been strong lately, with major indexes hitting a series of records and the Nasdaq closing out its third straight positive week last week.

The CBOE Volatility index jumped nearly 11 percent, but at 11.44 it remained at an extremely low level from a historical perspective. On Thursday the "fear index" closed at its lowest level since February 2007, adding to concerns that markets are not factoring in issues that could derail the rally.

While the June nonfarm payrolls report confirmed expectations that the economy bounced back in the second quarter, some analysts speculated that it also meant the Federal Reserve might raise interest rates earlier than had been previously anticipated.

Goldman Sachs estimated that the Fed could raise rates in the third quarter of 2015, compared with an earlier estimate of the first quarter of 2016.

The FTSEurofirst 300 index of pan-European shares fell 0.9 percent after data showed German industrial output declined 1.8 percent in May, its biggest drop in more than two years.

BioDelivery Sciences International Inc BDSI.O shares surged 10.3 percent to $13.23 after the company said its experimental pain drug, which it made with Endo International Plc ENDP.O, was found effective in a late-stage trial.

GT Advanced Technologies GTAT.O tumbled 13 percent to $17 on heavy volume after UBS removed the company from its U.S. Key Calls list.

(Reporting by Angela Moon; Editing by Nick Zieminski)