Less than a week remains for President Obama and Congress to agree to a plan that would avert tax hikes and spending cuts from kicking in automatically on Jan. 1.
Some investors are skeptical that lawmakers will resolve a self-inflicted crisis that could tip the economy into recession, while others are betting on a short-term compromise that prevents the worst and delays more difficult decisions to later in the year.
Either way, the possibility of a deal is also keeping the bears at bay, according to Mark Helweg, founder of financial tech company MicroQuant.
"People are expecting some sort of compromise to save the day, so they're hesitant to short the market because news on that front will push the market higher," Helweg said.
A letter from Treasury Secretary Tim Geithner to Congress sent after the bell on Wednesday may also weigh on markets.
In the letter, Geithner wrote that government borrowing will hit the debt ceiling on Monday. As a result, the Treasury Department will soon start using what it calls "extraordinary measures" to prevent government borrowing from exceeding the legal limit.
Such measures include suspending the reinvestment of federal workers' retirement contributions in short-term government bonds.
Amazon(AMZN) shares slid after the company was blamed for a one-day Netflix Inc(NFLX) service disruption. Meanwhile, Marvell Technology Group(MRVL) shares tumbled, after a jury ruled against the chip maker in a $1.17 billion patent infringement case.
Activist investors pummel Herbalife
Overseas, European markets made narrow gains in the first trading session after the Christmas holiday. Asian markets ended mixed, with Japan's Nikkei posting the strongest gains. The index has risen nearly 10% in the past month on expectations of further monetary policy easing and new government measures to stimulate the economy.