Aug. 19 (Bloomberg) -- U.S. stocks rose for a second day as energy shares climbed on a rebound in oil and Merck & Co. led drugmakers higher after a judge upheld a patent, helping the market erase an early drop triggered by a slide in China shares.

Occidental Petroleum Corp. and Murphy Oil Corp. led gains in energy shares as crude rose to a two-month high after the Energy Department said U.S. inventories declined the most in more than a year. Merck climbed 2.5 percent for the top advance in the Dow Jones Industrial Average after a federal judge said Teva Pharmaceutical Industries Ltd. can’t make a copy of its asthma drug Singulair. Pfizer Inc. added 2.4 percent.

The Standard & Poor’s 500 Index increased 0.7 percent to 996.46 at 4:10 p.m. in New York. The Dow jumped 61.22 points, or 0.7 percent, to 9,279.16. Two stocks rose for each that fell on the New York Stock Exchange. Some 7.9 billion shares changed hands on all U.S. exchanges, 16 percent below the three-month daily average.

“The economy is doing a little better than people thought,” said Edward Hemmelgarn, who oversees about $350 million as president of Shaker Investments Inc. in Cleveland. “We might be using a little more oil. People are taking that as a positive indicator of the economy expanding. You get news like this and that tends to dampen fears and causes people to want to get back in.”

Equities also erased earlier declines amid speculation the government will announce a second stimulus plan to shore up the economy in addition to President Barack Obama’s $787 billion recovery effort. White House spokesman Robert Gibbs said “there is no imminent economic announcement.”

‘Reason for the Turnaround’

“I heard it as being a reason for the turnaround,” said Kevin Kruszenski, director of equity trading at Keybanc Capital Markets in Cleveland. “They haven’t even spent the first one yet. And with Congress being out of session, I would be surprised at how that would be discussed right now.”

Energy shares in the S&P 500 climbed 1.9 percent collectively for the top gain among 10 groups after the government said oil stockpiles dropped 8.4 million barrels last week, the most since the week ended May 23, 2008. Crude for September delivery increased 4.7 percent to $72.42 a barrel. Prices are up 62 percent this year.

Occidental Petroleum advanced 2.9 percent to $71.53. Murphy Oil, the crude producer and refiner that operates filling stations at Wal-Mart Stores Inc., added 3.1 percent to $58.05.

Merck climbed 2.5 percent to $31.48, its highest price since October. U.S. District Judge Garrett E. Brown Jr. in Trenton, New Jersey, rejected Teva’s arguments that the patent on the main ingredient of Singulair is invalid or unenforceable. The judge said Teva can’t sell a generic version of the medicine, which had 2008 sales of $4.3 billion.

Commodity Shares Advance

Freeport-McMoRan Copper & Gold Inc. led a group of material producers in the S&P 500 to a 1.1 percent gain, the steepest among 10 groups after energy and health-care shares. Gold rebounded as the dollar’s decline enhanced its allure as an alternative investment. Gold futures for December delivery gained $5.60, or 0.6 percent, to $944.80 an ounce in New York. Freeport-McMoRan added 2.7 percent to $62.09.

Royal Caribbean Cruises Ltd. rose 6.4 percent to $17.91. The world’s second-largest cruise operator was boosted to “outperform” from “underperform” at Sanford C. Bernstein & Co.

Jack Henry & Associates Inc. added 5 percent to $23.20. The computer systems developer reported quarterly profit of 33 cents a share, exceeding the average analyst estimate by 11 percent, according to Bloomberg data.

Earnings Analysis

Per-share profits have topped analysts’ estimates by an average of 9.9 percent for the 473 companies in the S&P 500 that reported results since June 17, data compiled by Bloomberg shows. Earnings slumped 29 percent on average, a record eighth straight quarter of falling profits.

The S&P 500 has rallied 47 percent from a 12-year low in March amid speculation the worst of the recession is over. Edward McKelvey, a senior economist at Goldman Sachs Group Inc., said the contraction may already be over. He cited the gain in industrial production in July, helped by the government’s cash- for-clunkers program, along with the likelihood that output will continue to grow because of depleted inventories.

Deere & Co., the world’s largest maker of agricultural equipment, lost 2.9 percent to $43.78. The company posted third- quarter profit of 99 cents per share, beating the 56-cent average estimate of analysts surveyed by Bloomberg, while giving a forecast that implied it will have a near break-even fourth quarter. Analysts projected profit of 35 cents a share for the period.

Analyst Downgrades

D.R. Horton Inc. lost 2.3 percent to $11.94. The homebuilder was reduced to “sell’ from “hold” by Stifel Nicolaus.

Cigna Corp. fell 1.2 percent to $29.12 after losing as much as 4.2 percent. The health insurer was cut to “neutral” from “outperform” at Credit Suisse, which said 2010 will be “very competitive” and the company is likely to lose market share.

The Dow Jones Stoxx 600 Index of European shares retreated 0.3 percent today. A 43 percent rebound since March 9 has driven the regional measure’s valuation to about 40 times the profits of its companies, near the most expensive level since 2003, data compiled by Bloomberg show.

Global stocks tumbled earlier today on concern a potential rebound in corporate earnings and economic growth will falter. China’s Shanghai Composite Index slumped as much as 5.1 percent, extending its drop from a 2009 high to more than 20 percent, the common definition of a bear market. It ended the day down 4.3 percent.

‘Hanging Hopes’ on China

“People are hanging their hopes on China pulling us out of a recession,” said Brad Brooks, senior money manager at Value Line Securities, which oversees $2.5 billion in New York. “China’s growth looks great, but things may be a bit overstated. There has been a lot more integration of global markets over the past couple of years.”

The U.S. and Chinese governments have pledged more than $13 trillion to combat the worst financial crisis since the Great Depression, helping to fuel a nine-month rally in the Shanghai Composite that pushed the index’s price-to-earnings ratio to almost double the valuations for the S&P 500, according to data compiled by Bloomberg.

China’s stocks slumped this month as new loans in July declined to less than a quarter of June’s level and companies including Yunnan Copper Industry Co. reported losses. The Shanghai gauge has still climbed 53 percent this year, while the S&P 500 has added 10 percent.

Chinese-led tumbles in stocks often provide buying opportunities that send U.S. shares higher by the end of the day, according to an Aug. 17 Bespoke Investment Group LLC research note.

On days when Chinese stocks slid more than 3 percent and an exchange-traded fund that tracks the S&P 500 lost more than 1.5 percent at the open, the average open-to-close change in the ETF has been 2.1 percent with gains 67 percent of the time, according to Bespoke, which tracked the ETF since its inception in 1993.

To contact the reporter on this story: Kayla Carrick in New York at kcarrick1@bloomberg.net

Last Updated: August 19, 2009 16:33 EDT