Stocks Rally on Earnings, M&A News

Growing optimism on a Mideast cease-fire also boosted investor sentiment

Nascent optimism about a ceasefire in the Israel-Lebanon conflict and some solid corporate earnings were just the tonic the stock market needed Monday. Stocks finished sharply higher on the session, bolstered by solid earnings reports and buzzing deal news. Secretary of State Condoleeza Rice's arrival in Beirut to seek an Israel-Hezbollah ceasefire also supported stocks, while a busy week for earnings may cause volatility in the days ahead,says Standard & Poor's Equity Research.

The Dow Jones industrial average rose 182.67 points, or 1.68%, to 11,051.05. The broader Standard & Poor's 500 added 20.62 points, or 1.66%, to 1,260.91. The tech-heavy Nasdaq composite climbed 41.45 points, or 2.05%, to 2,061.84.

NYSE breadth was decidedly positive, with 28 issues advancing for every six declining. Nasdaq breadth was 23-8 positive.

Traders were shifting their attention from Mideast worries to upbeat earnings reports, analysts say. "It's a quiet 170 points to the upside," says Jay Suskind, co-head of capital markets at Ryan Beck, before the Dow pushed even higher. "Volume's rather light, and no one's yelling and screaming. It's a reflex move, in the sense that last week we were selling the baby with the bathwater based on geopolitical issues."

While the ongoing conflict in Israel and Lebanon remains volatile, investors saw Rice's visit as cause for optimism, says Peter Cardillo, chief market analyst at S.W. Bach. "The geopolitical is not going to disappear, that's for sure," Cardillo says. "But there's hope that some sort of positive outcome may help defuse the situation."

But some investors were already reining in their optimism, as the situation in the Mideast remains difficult. In the energy markets, September West Texas Intermediate crude oil futures closed up 62 cents at $75.05 a barrel as the White House said an immediate Mideast ceasefire would be "unenforceable." Crude futures rose earlier in the session on the news of Rice's visit to Lebanon.

Nevertheless, equity investors, who appeared skittish at the start of second-quarter earnings season after a few high-profile disappointments, may have reason to cheer. Corporate earnings may come in higher this year than previously forecast, according to Morgan Stanley, which raised its 2006 earnings-per-share estimate by 1.8%, from $83.50 to $85.

"Continue to look for earnings growth to slow to a mid-single-digit rate in the quarters ahead, but first-half strength in the global economy and attendant moves in commodity prices mandate that we mark to market," notes Henry McVey, chief U.S. investment strategist at Morgan Stanley.

The Federal Reserve was temporarily out of the spotlight Monday amid a quiet economic calendar. That could change, however, with June existing home sales and July consumer confidence both due Tuesday. Figures on second-quarter gross domestic product are on deck later in the week.

Some Fed-watchers expect central bankers to stop raising interest rates following the Aug. 8 meeting. "From his testimony before Congress last week, Chairman Bernanke successfully set the groundwork for an impending pause-- but not necessarily at the next meeting," observes Peter Hooper, chief U.S. economist at Deutsche Bank. "We do not believe the economic data will have cooled sufficiently to convince the Committee to stop at the August meeting."

Earnings season continued apace Monday. Shares of Merck (MRK) rose after the drugmaker posted a second-quarter profit that more than doubled. Peer Schering-Plough (SGP) was higher after swinging to a quarterly profit.

Telephone service provider BellSouth (BLS) reported an 11% increase in second-quarter profit on slightly higher sales. Shareholders on Friday approved selling the company to AT&T (T) for $67 billion in stock.

Semiconductor company Texas Instruments (TXN was set to announce quarterly results after the close. Companies slated to post earnings later in the week include Dow members General Motors (GM), 3M (MMM), Exxon Mobil (XOM), and Boeing (BA).

M&A activity was also in focus Monday. HCA (HCA) was higher on reports the hospital operator agreed to a $21.3 billion buyout bid from a private-equity consortium.

Chipmaker Advanced Micro Devices (AMD) was lower after the Intel (INTC) rival agreed to buy Canada's ATI Technologies (ATYT) for $5.4 billion.

In analyst upgrades, Dell (DELL) was higher after Citigroup raised its recommendation on the computer maker from hold to buy.

Elsewhere, Halliburton (HAL) was higher even as the oil services conglomerate delayed its plans to sell its KBR unit to investors. Merrill Lynch cut the shares from buy to neutral.

European markets finished sharply higher. In London, the Financial Times-Stock Exchange 100 index gained 114.2 points, or 2%, to 5,833.9. Germany's DAX index advanced 127.04 points, or 2.33%, to 5,578.05. In Paris, the CAC 40 index was up 96.38 points, or 2%, to 4,914.93.

Asian markets finished mixed. Japan's Nikkei 225 index eased 26.76 points, or 0.18%, to 14,794.5. In Hong Kong, the Hang Seng index edged up 16.41 points, or 0.1%, to 16,480.59. Korea's Kospi index declined 7.98 points, or 0.63%, to 1,263.35.

Treasury Market

Treasuries drifted ahead of a week with heavy supply. The 10-year note was little changed at 100-20/32 for a yield of 5.04%, while the 30-year bond edged down in price to 90-27/32 for a yield of 5.1%.

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