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S&P 500 closes at new high, led by banks; Nasdaq rallies 1%

Stocks finished broadly higher Tuesday, with the S&P 500 setting a new record, as investors cheered a batch of better-than-expected economic reports and merger activity.

Read MoreAfter-hours buzz: Workday, Wet Seal, Cerner & more

"The big surprise so far is that you didn't have more activity – there have been a lot of people that were short this market and for the S&P to make a record closing high, you'd have thought they'd break out a bit further," said Art Cashin, director of floor operations at UBS Financial Services. "[The bulls] have the momentum back—they have a minor obstacle in the S&P in the area between 1,910 and 1,913 but if we push through that, then things should be alright."

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The Dow Jones Industrial Average rallied 69.23 points to close at 16,675.50, lifted by American Express and JPMorgan. The blue-chip index is approximately 60 points from reaching its all-time high of 16,735.51.

The S&P 500 rose 11.38 points to end at 1,911.91. And the Nasdaq jumped 51.26 points to finish at 4,237.07.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, closed above 12.

Most S&P sectors finished higher, led by financials and techs.

U.S. equity markets were closed Monday for the Memorial Day holiday.

Among momentum stocks, Priceline, Tesla, Expedia and Facebook all rallied broadly.

Read MoreMissed the rally? Catch up with these 7 stocks

On the economic front, durable goods unexpectedly rose 0.8 percent in April, according to the Commerce Department, exceeding expectation for a loss of 0.7 percent.

Adding to positive news, S&P/Case-Shiller's composite index of 20 metropolitan areas rose 0.9 percent in March, edging past expectations for a gain of 0.7 percent.

Meanwhile, consumer confidence hit 83 in May, in line with expectations.

Gold prices slipped 2 percent to a 3-1/2 month low, extending losses after strong data lifted optimism about the economy. Gold miners including Barrick Gold, Newmont and Goldcorp were trading lower.

Adding to gains, European Central Bank chief Mario Draghi said Monday the bank must be "particularly watchful" for any negative price spiral in the euro zone. That added to suggestions from other ECB policymakers that the bank was ready to cut rates next week to counter low inflation and weak lending in the euro zone, keeping asset purchases as an option. European shares rallied.

Pfizer edged up a day after the drugmaker walked away from its $116 billion bid to acquire AstraZeneca. AstraZeneca shares dropped.

Read MoreHow AstraZeneca escaped Pfizer clutches...this time

Hillshire Brands spiked more than 20 percent after the packaged food company was offered to be bought by poultry producer Pilgrim's Pride in a deal valued at $5.6 billion. Shares of Pinnacle Foods, which is in the process of being acquired by Hillshire, fell.

Over the weekend, the Financial Times reported that Apple will announce a software platform for its iPhone that will control home appliances. The announcement is expected at the company's Worldwide Developer Conference, which begins June 2.

Aeropostale surged after the apparel retailer said it secured a $150 million credit facility from private equity firm Sycamore Partners, in what could be a lifeline for the struggling chain. Aeropostale reported its sixth straight quarterly loss last week.

Netflix agreed to buy the earliest home video rights to Sony's animated films, sources told CNBC. The deal, effective immediately and good for several years, effectively carves out the animated features from the Sony films that currently air on Starz shortly after they appear in theaters.

Read MoreBulls have the momentum now, says Art Cashin

—By CNBC's JeeYeon Park

Coming up this week:

WEDNESDAY: Mortgage applications, 5-yr note auction; Earnings from Michael Kors, Toll Brothers
THURSDAY: GDP, jobless claims, corporate profits, pending home sales, oil inventories, 7-yr note auction; Earnings from Costco, Abercrombie & Fitch
FRIDAY: Personal income & outlays, consumer sentiment, farm prices

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