Stocks closed higher as the Dow ended at a new record following better-than-expected economic data and continued strength in mergers activity.
This morning, the ISM manufacturing index rose to its highest level in 11 months, calming fears of slowing U.S. economic growth.
"We're getting that soft landing scenario people were hoping for -- inflation pressures are starting to ease," said Thomas Higgins, chief economist at Payden & Rygel. "It looks like the economy is going to avoid a recession, which is good for stocks. That and valuation should drive equity prices."
The index of national factory activity rose to 54.7 from 50.9 in March, above economists' median estimate of 51.0.
"The market liked the manufacturing number that came out this morning," said Jay Suskind, co-head of capital markets at Ryan Beck & Co. "Every day we get a new number out there that changes the picture but this market is still driven by what the Fed is going to do with interest rates."
The Dow Jones Industrial Average closed about 25 points from an all-time intraday high set last week. The S&P 500 and the Nasdaq also ended with modest gains, reversing earlier losses.
Rupert Murdoch's media conglomerate News Corp. submitted a $5 billion bid for the publisher of the Wall Street Journal, sending Dow Jones shares to big gains. CNBC's David Faber was the first to report on the unsolicited buyout offer of $60 a share.
However, Dow Jones' controllingshareholders, the Bancroft family, issued a statement late Tuesday saying they will likely vote against a deal with Murdoch. Dow Jones shares closed with a gain of 50%.
"Merger activity is one of the things that's driving the strength in this market," said Ted Weisberg, president of Seaport Securities.
In other M&A news, shares of 24/7 Real Media gained 20% after news reports said tech giant Microsoft may be among potential suitors for the Internet marketing firm.
Breadth was positive with advancing stocks outnumbering decliners by a modest margin. Eight of 10 sectors in the S&P 500 traded higher, led by a 1.1% gain in utilities. Basic materials was the worst performer on Tuesday, down 0.8%, and continues to pare year-to-date gains.
New York light sweet crude futures fell 2% ahead of Wednesday's release of weekly EIA inventory data.
In earnings news, Procter & Gamble said Tuesday third-quarter results rose from the same quarter last year, driven by strong sales growth for razors, beauty and health-care products. P&G reported quarterly earnings of 74 cents a share, in line with analysts' estimates.
Shares of Circuit City Stores fell 7% after the electronics retailer said it now is expecting a first-quarter loss due to weak sales of high-end TVs. The company also withdrew earnings guidance for the first half of year.
Sirius Satellite Radio reported a narrower loss for its first quarter compared with the same period a year ago, when it recorded $225 million in expenses for stock paid to Howard Stern.
BEA Systems fell 4% after the software maker cut sales guidance for the second time in a month.
U.K. Market Dips, Nikkei Ends Lower
Stocks finished lower in London amid low trading volume as the majority of European stock markets were closed for the May Day holiday.
Investors will have time to digest Deutsche Boerse's decision Monday to buy U.S. options market International Securities Exchange for $2.8 billion, a 48% premium on Friday's closing price.
Britain's Imperial Tobacco posted first-half earnings growth of 13%, beating analysts’ expectations and expects strong growth in the back half of the year.
Tokyo's Nikkei 225 Average closed down in slow trade as investors took profits in recent gainers such as Fanuc and TDK ahead of market holidays.
Shares of Matsushita Electric Industrial and Sumitomo Metal Mining advanced after they reported solid earnings late on Friday, limiting losses in the Nikkei.
Traders said market activity was likely to stay sluggish in tomorrow's session. Japanese markets will be closed on Thursday and Friday.
Markets in China, Hong Kong, India, Singapore and South Korea were closed on Tuesday for the Labor Day holiday.