Oct. 29 (Bloomberg) -- U.S. stocks gained for a second day on expectations the Federal Reserve will cut interest rates to the lowest level since 2004 to prop up the sagging economy.

Schlumberger Ltd. and Exxon Mobil Corp. led gains in all 40 energy companies in the Standard & Poor's 500 Index on prospects that lower borrowing costs will stoke demand for oil. Freeport- McMoRan Copper & Gold Inc., the largest publicly traded copper producer, rallied 9.5 percent as metal prices increased. The Dow Jones Industrial Average extended its two-day advance to more than 1,000 points as General Motors Corp. climbed 9.6 percent on speculation it will merge with Chrysler LLC.

The S&P 500 rose 14.11 points, or 1.5 percent, to 954.62 at 1:55 p.m. in New York. The Dow added 135.16 points, or 1.5 percent, to 9,200.28 following an 889-point rally yesterday. The Nasdaq Composite Index increased 27.81, or 1.7 percent, to 1,677.28. Almost three stocks rose for each that fell on the New York Stock Exchange.

``After a huge rally yesterday, if the market could break even or be up some it would be a real positive from what we've been used to the last few weeks,'' said Joseph Williams, who helps manage $15 billion at Commerce Trust Co. in Kansas City, Missouri. ```The Fed is doing every creative thing they can to try to resolve the financial crisis we're in, and they're going to lower interest rates.''

Overseas Gains

Stocks gained in Europe and Asia for a second day as falling credit costs spurred a rally in financial shares, while higher commodity prices pushed up oil and metals producers.

Schlumberger, the world's largest oilfield-services company, jumped 9 percent to $52.34. Chevron, the second-biggest U.S. energy company, added 2.4 percent to $71.69. The S&P 500 Energy Index jumped 3.8 percent, adding to yesterday's 12 percent rally.

General Motors Corp. rallied 9.6 percent to $6.85 for the top gain in the Dow. The automaker resolved ``major issues'' in merger talks with Cerberus Capital Management LP's Chrysler LLC, Reuters reported, citing unidentified people.

Johnson & Johnson lost $2.83 to $61.36. The stock was cut to ``neutral'' from ``overweight'' at JPMorgan Chase & Co., which said 2009 will be a ``tough year'' as two of the company's three largest drugs face generic competition.

U.S. stock-index futures reversed earlier gains before the open of U.S. exchanges after the Commerce Department said orders for U.S. durable goods excluding transportation equipment fell in September for a second month as the credit freeze deepened and sales declined. The 1.1 percent drop in bookings of goods meant to last followed a revised 4.1 percent decrease in August that was larger than previously reported.

Libor Retreats

The earlier advance in U.S. futures were spurred by a 13th straight drop in three-month dollar borrowing costs. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars dropped 5 basis points to 3.42 percent, according to the British Bankers' Association.

Sealed Air Corp. dropped the most in the S&P 500, falling 22 percent to $16.49. The maker of Bubble Wrap shipping products reported third-quarter profit that trailed analysts' estimates because of higher costs for plastic resins.

Aetna Inc. slid $1.94, or 7 percent, to $25.86. The third- largest U.S. health insurer reduced its forecast for the year and said third-quarter profit fell 44 percent as the company booked investment losses tied to the global financial crisis.

The Federal Reserve is scheduled to announce its decision on borrowing costs at about 2:15 p.m. in Washington. Economists surveyed by Bloomberg News forecast a reduction by half a percentage point to 1 percent.

Fed Bets

Fed-funds futures suggests traders are betting on 48 percent odds that policy makers will cut the target for overnight lending by 0.75 percentage point. Those trades are no longer providing the most accurate signal of where the Fed will take borrowing costs since traders are looking at the rates banks charge each other for overnight loans when figuring out their bets on what the central bank will do. For the last six weeks the Fed has failed to get those overnight rates to line up with its target.

The Fed has already cut the benchmark rate from 5.25 percent in the past 13 months and created six lending programs channeling more than $1 trillion into the financial system.

Advance figures on gross domestic product, due from the Commerce Department tomorrow, may show the economy contracted at a 0.5 percent annual rate from July through September, according to a Bloomberg survey. It would be the second drop in a year and the biggest since the 2001 recession.

Stocks soared yesterday with the Dow average posting its second-best point gain as the cheapest valuations in 23 years lured investors and increased commercial paper sales signaled credit markets are thawing. The S&P 500 jumped 11 percent yesterday, trimming its monthly decline to less than 20 percent and its yearly loss to 36 percent.

October Slump

Equities around the world have tumbled this month, wiping out more than $10 trillion of market value, after money markets froze, banks' credit losses climbed to $680 billion and economic growth weakened.

Companies in the S&P 500 that reported third-quarter earnings so far posted a 17 percent decline on average, according to Bloomberg data. A profit drop for the entire index would mark the fifth straight quarterly slide, the longest stretch since the burst of the dot-com bubble at the start of this decade.

Investors speculating on a rebound in U.S. stocks may have a better chance in the first year of a Barack Obama presidency than a John McCain administration, if election history is any guide.

Since 1900, the Dow Jones Industrial Average rose 9.8 percent in the 12 months after the Democratic Party captured the White House, based on the median change following the election of seven Democrats from Woodrow Wilson to Bill Clinton. Among newly elected Republicans, five -- including Herbert Hoover, Richard Nixon and George W. Bush -- preceded stock-market declines, with a median retreat of 2.5 percent for all 10, data compiled by Bloomberg show.

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To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net;

Last Updated: October 29, 2008 13:56 EDT