U.S. stocks closed lower for a second straight session on Wednesday, as investors booked profits with indexes near record levels after Federal Reserve Chair Jerome Powell flagged potentially stretched stock prices and ahead of a reading on inflation later in the week.

Investors are trying to gauge the trajectory of rate cuts from the central bank as it attempts to buttress an economy that has shown signs of a flagging labor market without stoking inflation.

With each of the three major indexes, along with the small-cap Russell 2000, closing at record highs simultaneously for the first time in years earlier this week, Powell said on Tuesday that asset prices appeared fairly highly valued. As his colleagues staked out arguments on both sides of the policy divide, the Fed chair emphasized the tightrope the central bank must walk in upcoming policy decisions.

To some analysts, the comments were reminiscent of those by former Fed Chair Alan Greenspan, who said in a 1996 speech that "irrational exuberance" had pushed up asset values.

Last week's Fed rate cut helped lift equities in September, typically a weak month for stocks, with investors now banking on further easing to keep the rally alive.

"With the S&P pricing in 23-24 times expected earnings and expectations priced in to that multiple of about 15% annualized earnings growth over the next five years, that sounds pretty rich to me," said Ron Albahary, chief investment officer at LNW in Philadelphia.

"So not that we're market timers at all, but the idea that people might be using this, using the Fed's comments, Powell's comments as just a reason to trim back a little bit makes sense to me."

According to preliminary data, the S&P 500 lost 19.78 points, or 0.30%, to end at 6,637.14 points, while the Nasdaq Composite lost 77.10 points, or 0.34%, to 22,496.37. The Dow Jones Industrial Average fell 178.22 points, or 0.38%, to 46,114.56.

Some valuation measures for stocks are at their highest level since 2021, and a further climb would elevate them to thresholds not seen in decades, at the height of the internet boom. Materials was the worst-performing of the S&P 500 sectors, as Freeport-McMoRan plunged after it declared force majeure at its Grasberg mine in Indonesia and said it is expecting consolidated sales to be lower for copper and gold in the third quarter.

On the plus side, the S&P 500 energy index rose as the best-performing sector, tracking higher crude prices, which rose to a seven-week high after a surprise drop in U.S. weekly crude inventories.

Data released on Wednesday showed the sales of freshly constructed single-family U.S. homes unexpectedly surged by 20.5% in August. In company news, Lithium Americas' U.S.-listed shares nearly doubled after Reuters reported on Tuesday that President Donald Trump's administration was seeking an equity stake of up to 10% in the company.

Talks are under way to discuss a government loan exceeding $2.26 billion for the company's Thacker Pass lithium project with General Motors, which also advanced. UBS also upgraded the automaker to "buy" from "neutral." Micron Technology ended lower after the memory chipmaker reported quarterly results. Oracle declined after Bloomberg News said the company was looking to raise $15 billion in corporate bond sales.

Investors' attention will now shift to the personal consumption expenditures data, the Fed's preferred inflation gauge, due for release later this week.

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(Reporting by Chuck Mikolajczak in New York; Additional reporting by Niket Nishant, Sukriti Gupta and Purvi Agarwal in Bengaluru; Editing by Matthew Lewis)