US STOCKS-Wall St drops as cyclicals weigh; small-caps lag

* Focus turns to earnings season

* Defensive sectors outperform for the day

* VIX pops but still at low levels

* Indexes off: Dow 0.32 pct; S&P 500 0.45 pct; Nasdaq off 0.74 pct (Updates to mid-afternoon, changes byline)

By Chuck Mikolajczak

NEW YORK, July 7 (Reuters) - U.S. stocks fell on Monday, retreating from record levels as investors hesitated to make big bets before the dawn 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 0.7 percent. The only sectors showing modest gains were defensive groups such as utilities, up 0.3 percent, telecom, up 0.3 percent and consumer staples, up 0.1 percent.

Small-cap stocks also underperformed, with the S&P Small-Cap 600 index down 1.2 percent. The Russell 2000 fell 1.5 percent, on track for its biggest percentage drop since May 20.

Wall Street had hit a number of milestones on Thursday, the final 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 (NYSE: AA - news) and Wells Fargo & Co.

"Let's face it, this earnings season has quite a bit riding on it, particularly given the contraction we saw in the first quarter," said Peter Kenny, CEO of Clearpool Group in New York.

"The markets have moved robustly higher and significantly higher than many expected for the first six months of this year, so earnings need to be pretty much spot on or better than expected and anything less than that will lead to a period of underperformance."

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 55.34 points or 0.32 percent, to 17,012.92, the S&P 500 lost 8.97 points or 0.45 percent, to 1,976.47 and the Nasdaq Composite dropped 33.32 points or 0.74 percent, to 4,452.60.

The CBOE Volatility index jumped nearly 11 percent, its biggest percentage jump in nearly three months, but at 11.42 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.

As the June payrolls report confirmed expectations that the economy rebounded in the second quarter, some analysts speculated that it could result in an earlier than anticipated hike in interest rates by the U.S. Federal Reserve.

Goldman Sachs (NYSE: GS-PB - news) estimated that the Fed could raise rates in the third quarter of 2015, compared with an earlier estimate of the first quarter of 2016.

BioDelivery Sciences International Inc (NasdaqCM: BDSI - news) shares surged 7.3 percent to $12.86 after the company said its experimental pain drug, which it made with Endo International (NasdaqGS: ENDP - news) Plc, was found effective in a late-stage trial.

GT Advanced Technologies (Xetra: A1JDP0 - news) tumbled 13.4 percent to $16.93 on heavy volume after UBS (NYSEArca: FBGX - news) removed the company from its U.S. Key Calls list. (Reporting by Chuck Mikolajczak; Editing by Nick Zieminski)