June 11 (Bloomberg) -- U.S. stocks rose on optimism the Federal Reserve will cut interest rates this month, providing more fuel for the rally that has lifted the Standard & Poor's 500 Index to the highest in almost a year.

International Business Machines Corp. gained after Merrill Lynch & Co. said shares of the world's largest computer maker won't be hurt by a federal probe of its accounting. Semiconductor shares fell after Texas Instruments Inc. reduced its second- quarter profit estimate.

``The market continues to embrace good news and ignore bad news,'' said Michael Farr, who manages $350 million for Farr, Miller & Washington in Washington, D.C. ``That's classic bull market mentality.''

The S&P 500 gained 12.64, or 1.3 percent, to 997.48, its highest since June 20. The Dow Jones Industrial Average added 128.33, or 1.4 percent, to 9183.22. The Nasdaq Composite Index advanced 18.35, or 1.1 percent, to 1646.02.

A Federal Reserve survey of regional economies that said the U.S. expanded at a ``subpar'' pace since April bolstered investor optimism the central bank would cut interest rates June 25. A cut would lower companies' borrowing costs, boosting profits.

``If they're saying things are growing slowly, then perhaps there's another rate cut in the works,'' said Nicholas Gerber, manager of the $1.6 billion Ameristock Mutual Fund.

Nine stocks rose for every four that fell on the New York Stock Exchange. Almost 1.5 billion shares changed hands on the Big Board, 3.8 percent more than its daily average over the past three months.

The S&P 500, up less than a third of a percent before the Fed's economic report was released at 2 p.m. New York time, surged in the final two hours of trading. The index has jumped 25 percent since March 11. The Dow average is at its highest level since July.

IBM, Boston Scientific Gain

IBM rose $2.26 to $83.97, and was the biggest contributor to the Dow's advance. Merrill Lynch analyst Steven Milunovich added the largest computer maker to the company's Focus One list of recommended stocks.

An SEC investigation into how the Armonk, New York-based company accounted for sales is unlikely to hurt the shares further, Milunovich wrote in a note to clients. IBM declined about 6 percent through yesterday since revealing the government probe last week.

Boston Scientific Corp., the second-largest maker of stents, jumped $4.76, or 8.7 percent, to $59.75. The company plans to file for U.S. approval of drug-coated versions of the heart devices on or about June 23. Johnson & Johnson, the largest maker of stents, advanced 36 cents to $53.00.

Chip Stocks Fall

Texas Instruments fell $1.53, or 8 percent, to $18.86 after reducing its second-quarter profit and sales estimate. The biggest maker of chips that power mobile phones said profit will be 6 cents a share and sales will increase about 5 percent from the first quarter's $2.19 billion. The Dallas-based company last month forecast profit of 8 cents and a sales gain of 7 percent.

The company blamed the outbreak of severe acute respiratory syndrome in Asia and said lower demand for wireless phones has compounded already high inventory levels.

``Now we're starting to see the effects'' of SARS on company earnings, said Peter Coolidge, a portfolio manager at Deltec Asset Management LLC in New York.

Intel Declines

Intel Corp., the world's biggest semiconductor maker, dropped 8 cents to $21.89. Chip stocks are among the top performers since mid-March, with the Philadelphia Semiconductor Index up 36 percent.

Morgan Stanley analyst Mark Edelstone lowered his rating on the semiconductor industry, saying the three-month rally in the stocks has outpaced improvements in their business outlook.

Edelstone, ranked No. 3 among semiconductor analysts by money managers in Institutional Investor magazine's 2002 survey, downgraded the chipmakers to ``in-line'' from ``attractive.''

``The sharp advance enjoyed by the stocks in recent months and the potential that near-term earnings risk may increase suggest that the reward-to-risk relationship for the stocks has become less favorable,'' Edelstone wrote in a note to clients.

Oil Stocks Advance

Oil stocks rose after OPEC voted not to raise production levels and the U.S. Department of Energy reported U.S. crude reserves fell by a larger-than-expected 4.6 million barrels last week.

Exxon Mobil Corp. added 66 cents to $38.20. ChevronTexaco Corp. gained $1.38 to $75.61. ConocoPhillips added 74 cents to $55.29. Crude oil for July delivery rose 63 cents, or 2 percent, to $32.36 a barrel on the New York Mercantile Exchange, the highest closing price since March 17.

The 14-member S&P Supercomposite Homebuilding index gained 6 percent, its biggest advance of the year, on prospects of lower interest rates and after Lennar Corp. boosted its 2003 profit forecast.

Lennar jumped $5.70 to $74.45. The second-largest builder by market value said its fiscal second-quarter profit rose 51 percent as lower mortgage rates spurred home sales. Centex Corp. added $5.90 to $85.81 and KB Home rose $5.11 to $67.01.

Eli Lilly Jumps

Eli Lilly & Co. jumped $2.96 to $63.19. The maker of the top- selling schizophrenia drug Zyprexa said U.S. officials finished inspecting two Indianapolis plants that must be cleared before a depression medicine and a new version of Zyprexa can be approved. The drug maker said second-quarter profit will be at the high end of its forecast of 59 cents to 61 cents.

Genentech Inc. gained $3.72 to $74.32, Gilead Sciences Inc. rose $1.67 to $52.25 and Amgen Inc. added 1.66 to $65.33.

Biotechnology shares should rally further on ``positive news flow'' from products including Genentech's Avastin drug and as government regulators appear to be approving drugs more readily, Merrill Lynch analyst Eric Ende wrote in a note to clients.

St. Jude Medical Inc. rose $3.11 to $61.56. The third-largest maker of implantable defibrillators will have higher-than-expected revenue from the devices, Deutsche Bank analyst Bruce Jacobs wrote in a report. He raised the stock to ``buy'' from ``hold'' and said it would reach $70 in the next year.

Freddie Mac fell $1.50 to $50.00. The second-biggest buyer of U.S. mortgages is the subject of criminal and securities investigations after ousting its top three executives amid a restatement of earnings for the past three years.

Mesa Air Group Inc. dropped 50 cents to $6.35. The regional carrier that operates flights for America West Express and US Airways Express said it will sell $75 million in convertible debt.

Futures, QQQs

S&P 500 futures expiring in June rose 10.50 to 997.20 on the Chicago Mercantile Exchange. Futures for the Nasdaq-100 Index added 14.50 to 1229.00. The index, a benchmark for Nasdaq's largest companies, gained 15.25 to 1228.24.

Nasdaq-100 tracking shares, known by their QQQ ticker symbol, advanced 34 cents to $30.52. The S&P 500 shares known as Spiders climbed $1.05 to $100.30.

The Russell 2000 Index of smaller stocks rose 4.54, or 1 percent, to 455.50. The Wilshire 5000 Total Market Index, the broadest measure of U.S. shares, advanced 119.41, or 1 percent, to 9537.94. Based on changes in the Wilshire, the market value of U.S. stocks rose by $143 billion.

Last Updated: June 11, 2003 16:33 EDT