July 9 (Bloomberg) -- U.S. stocks gained as an analyst upgrade of Goldman Sachs Group Inc. spurred a rally in financial shares and a rebound in natural-gas prices lifted energy producers, tempering a drop in drugmakers.

Goldman Sachs surged 3.4 percent as Bank of America Corp. advised buying the shares and said the firm may post record trading revenue. Southwestern Energy Co. and Cabot Oil & Gas Corp. jumped at least 4.8 percent as natural gas and oil snapped their longest losing streaks of the year. Merck & Co. lost 3.7 percent to lead drug companies lower after Natixis Bleichroeder downgraded the shares.

The Standard & Poor’s 500 Index added 0.4 percent to 882.68 at 4:08 p.m. in New York, rebounding from a two-month low. The Dow Jones Industrial Average advanced 4.76 points, or 0.1 percent, to 8,183.17. Treasuries fell, sending yields on 10-year notes up 0.11 percentage point to 3.41 percent.

“The burden of proof is now on earnings to come through and validate expectations,” said Mark Freeman, a portfolio manager at Westwood Management Corp. in Dallas, which oversees $7.5 billion. “There’s going to be a significant amount of pain associated to the transition the economy’s going through. We’re looking for companies that can provide an earnings bridge through this period.”

Benchmark indexes rallied in early trading after Alcoa Inc., the first Dow company to release second-quarter earnings, posted better-than-estimated results and initial jobless claims fell to the lowest level since January. Stocks pared gains as billionaire investor Warren Buffett told ABC the economy is not yet in recovery and may need more federal stimulus.

Goldman Rallies

Goldman Sachs added $4.66 to $143.21, leading financial shares to a 1.4 percent advance for the best gain among the 10 industry groups in the S&P 500. The shares were raised to “buy” from “neutral” at Bank of America, which said second- quarter earnings are likely to beat estimates. The analysts also increased their 2009 and 2010 profit forecasts for Goldman and boosted its share-price estimate to $175 from $144.

Southwestern Energy, the only S&P 500 energy company to rise last year, added 4.8 percent to $37.09. Cabot gained 5.3 percent to $29.47. Natural gas futures rose, snapping a seven- day losing streak, after the Energy Department said stockpiles gained 75 billion cubic feet last week, 10 billion less than the average estimate in a Bloomberg survey of analysts.

Crude for August delivery added 0.4 percent to $60.37 a barrel, rebounding from a seven-week low and breaking a six-day streak of declines.

Merck Tumbles

Merck tumbled 3.7 percent to $27.01, the steepest drop in the Dow, after Natixis analyst Jon Lecroy reduced his rating to “hold” from “buy.” The analyst cited concern that a competing drug from Abbott Laboratories may be better than Merck and Schering-Plough Corp.’s cholesterol drug Zetia after a study of Abbott’s medicine was ended early.

Alcoa added as much as 6.6 percent before erasing the gain to close down 2.4 percent at $9.23. The company reported a loss excluding certain items of 26 cents a share, narrower than analysts’ average estimate for a 38-cent loss, after production cuts and workforce reductions helped the company save money. Sales fell 41 percent to $4.24 billion.

“We’re seeing the initial signs” of economic improvement, including rising commodity prices, declining new jobless claims and improving earnings estimates, said Jason Pride, director of research at Haverford Trust Co. in Radnor, Pennsylvania. “Expectations are on the low side generally speaking. The economy on a near-term basis is going to be stronger than people expect.” Haverford Trust manages $5 billion.

Rally Stalls

Even though the S&P 500 gained 15 percent in the second quarter for its best rally since 1998, the advance stalled in June, leaving the index up less than 0.1 percent in the month. The index has dropped 6.7 percent since June 12 on concern the rebound of as much as 40 percent from a 12-year low in March outpaced prospects for a recovery in the economy.

Profits of S&P 500 companies probably fell 34 percent last quarter from a year earlier after plunging 33 percent in the first quarter, according to analyst estimates compiled by Bloomberg. The analysts forecast a 21 percent year-on-year drop in the third quarter.

Investors are paying 14 times profit from continuing operations over the past 12 months for S&P 500 companies. When the valuation reached 15.5 on June 2, it was the most expensive since October.

Casino shares jumped after BMO Capital Markets said data on Las Vegas Strip gambling revenue in May were a “mild positive” for the industry. Wynn Resorts Ltd. increased 6.8 percent to $31.93.

KB Rallies

KB Home climbed 9.3 percent to $12.44 for the biggest advance in the S&P 500. The Los Angeles-based homebuilder that targets first-time buyers was raised to “outperform” from “neutral” at Credit Suisse Group AG, which said KB Home may see “solid order trends” through the second half of the year and the stock’s valuation is “compelling.”

Starwood Hotels & Resorts Worldwide Inc. rose 6.7 percent to $20.19. The third-largest U.S. lodging company was boosted to “market perform” from “underperform” at FBR Capital Markets Corp.

Western Union Co. rose 5.8 percent to $16.49. The world’s largest money-transfer business was boosted to “outperform” from “neutral” at Credit Suisse.

AIG Slides

American International Group Inc. tumbled 28 percent to $9.48, the biggest drop in the S&P 500. The insurer bailed out four times by the government will likely have no value left for private shareholders after repaying the U.S., Citigroup Inc. said.

Limited Brands Inc. slid 4 percent to $10.89. The owner of the Victoria’s Secret chain said sales at stores open at least one year dropped 12 percent in June, more than the 8.1 percent expected in a Retail Metrics survey of analysts.

3Com Corp. fell 8.5 percent to $4.30. The networking- equipment maker forecast first-quarter profit of 5 cents a share at most. That trailed the average analyst estimate of 7 cents in a Bloomberg survey.

Kennametal Inc., which supplies tools to the mining and energy industries, dropped 8.2 percent to $15.75. The company aims to sell 6.5 million shares, raising money to pay debt, and said the recession will continue to hit the business in 2010.

U.S. Treasury debt fell as the government sold $11 billion of 30-year bonds in an auction, the final of four this week, an unprecedented number. The U.S. government is borrowing record amounts to finance deficit spending to help the economy.

To contact the reporter on this story: Elizabeth Stanton in New York at estanton@bloomberg.net.

Last Updated: July 9, 2009 16:36 EDT