May 2 (Bloomberg) -- U.S. stocks rose as oil prices held below $50 a barrel, curbing concern higher energy costs may erode consumer demand.

``Oil prices will soften some and that will certainly be a psychological boost for investors,'' said Warren Koontz, who helps manage $10 billion at Loomis Sayles & Co. in Boston. ``The economy still has reasonably good strength. The markets will settle down here.'' He expects the Standard & Poor's 500 Index to gain about 9 percent over the next 12 to 18 months.

Retailers including Home Depot Inc. led the advance. Google Inc., the most-used Internet search engine, climbed after Prudential Equity Group increased its share-price target.

The S&P 500 rose 2.54, or 0.2 percent, to 1159.39 as of 12:32 p.m. in New York. The Dow Jones Industrial Average added 42.40, or 0.4 percent, to 10,234.91. American International Group Inc. was the biggest contributor to both benchmarks on relief the company has put its accounting missteps behind it.

The Nasdaq Composite Index was up 4.66, or 0.2 percent, at 1926.31.

Three stocks advanced for every two that fell on the New York Stock Exchange. Some 717 million shares changed hands on the Big Board, 5.9 percent more than the same time a week ago.

Optimism

Prudential Equity Group LLC chief investment strategist Edward Keon has become more optimistic about U.S. stocks after the Dow average last week finished its worst month in more than two years, dropping 3 percent in April. The S&P 500 lost 2 percent and the Nasdaq slumped 3.9 percent in the period.

Keon raised his recommended stock allocation to 80 percent from 75 percent, making him the most-bullish U.S. strategist among 14 surveyed by Bloomberg. First-quarter ``earnings have been terrific,'' Keon wrote in a note to clients.

His view contrasts with JPMorgan's Abhijit Chakrabortti, who cut his U.S. and global weighting on stocks to 55 percent from 70 percent. Earnings growth will fall ``below trend'' and there will be ``no growth'' in 2006, the strategist wrote.

Crude oil for June delivery dropped 0.7 percent to $49.35 a barrel in New York after earlier falling as much as 1.4 percent on speculation slower economic growth in the U.S., Europe and Japan and increased output will bolster inventories. Prices have slumped 16 percent since reaching a record $58.28 a month ago.

An index of companies that cater to consumers and are dependent on economic growth advanced 0.5 percent, the biggest increase among 10 industry groups in the S&P 500. Home Depot, the world's largest home-improvement retailer, gained 86 cents to $36.23. Target Corp., the No. 2 U.S. discounter, rose 42 cents to $46.83.

Google Gains

Google added $1.74 to $221.74. The company will see higher earnings growth due to the ``significant growth in sponsored- search advertising,'' Prudential analyst Mark J. Rowen wrote in a report. He raised his share-price target to $284 from $260.

AIG rallied $3.46, or 6.8 percent, to $54.31. The world's largest insurer said it will correct five years of results for reinsurance and other transactions that inflated net worth by $2.7 billion, or $1 billion more than an earlier estimate.

AIG has lost more than $58 billion of stock market value since probes by New York Attorney General Eliot Spitzer and the U.S. Securities and Exchange Commission became public in February.

While April is historically the best month for the Dow average, May is among the worst, with the benchmark gaining an average 0.1 percent since 1950, according to the Stock Trader's Almanac. Investors shouldn't expect the trend to change this month, according to Jeffrey Hirsch, president of the Old Tappan, New Jersey-based Stock Trader's Almanac.

`Not Chasing'

``It's the summer vacation, kids are home, low volume,'' said Hirsch. We've ``tightened up our stocks. We're not chasing after things right now.''

Economic reports today gave mixed signals on the economy. The Institute for Supply Management's factory index fell to 53.3 in April from 55.2, lower than the reading of 55 expected by economists in a Bloomberg News survey. Construction spending in March rose 0.5 percent to a record $1.052 trillion, the Commerce Department said. Economists forecast a 0.3 percent gain.

Investors will get more insight into the economy from tomorrow's Federal Reserve meeting on interest rates. The central bank has lifted its overnight bank lending rate by a quarter point at each of the past seven meetings and has stuck to a plan of raising borrowing costs at a ``measured'' pace.

All 22 of Wall Street's biggest bond-trading firms surveyed by Bloomberg News expect another quarter-point increase to 3 percent.

``Markets don't like change,'' said Joseph Zock, who helps manage $900 million at Capital Management Associates in New York. The language ``provides investors with confidence that rates won't soar too high and the economy is moving at a measured pace as well.''

Of those 22 primary dealers, five expect the Fed to drop its use of the word ``measured'' tomorrow.

MCI Bids

MCI Inc., the second-largest U.S. long-distance phone company, said it received a $26-a-share offer from Verizon Communications Inc. that MCI considers superior to Qwest Communications International Inc.'s bid of April 21.

The company said in a statement distributed by PR Newswire that many of its ``most important business customers'' indicated they prefer a transaction between MCI and Verizon.

MCI shares fell 22 cents to $26.31. Verizon rose 9 cents to $35.89. Qwest, the U.S.'s fourth-largest local-phone company, decreased 7 cents to $3.35.

Neiman Marcus Group Inc. lost $5.57 to $92.75. The department-store chain that sells $4,800 Gucci purses agreed to be bought by Texas Pacific Group and Warburg Pincus LLC for $5.1 billion. The two buyout firms said they will pay $100 a share. The stock had surged 50 percent since its 2005 low on Jan. 28.

Brokerages

Brokerages slumped after UBS AG cut its rating on them, citing concern about demand for equities. UBS downgraded Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. to ``neutral'' from ``buy.''

Merrill, the world's largest securities firm, fell $1.32 to $52.61. Goldman, the third-biggest U.S. securities firm, slid $3.43 to $103.36. Lehman, the No. 5, declined $3.50 to $88.22.

Morgan Stanley, the largest securities firm by market value, dropped $3.57 to $49.05. The 6.7 percent tumble was the steepest in the S&P 500. The company said its board decided to keep Philip J. Purcell as chairman and chief executive, rejecting demands by former executives that he be ousted.

To contact the reporter on this story: Ari Levy in New York at alevy5@bloomberg.net.

Last Updated: May 2, 2005 12:35 EDT