Stocks closed a holiday-shortened session with modest gains following mixed economic data and crude oil prices that stretched above $71 a barrel.
"The two days before the July 4th holiday are usually good for the market," said Michael Sheldon, chief market strategist at Spencer Clarke. "We think there are some headwinds, but overall the atmosphere is generally positive for the second half of the year."
The Dow Jones Industrial Average rose about 42 points, or 0.3%, while the S&P 500 and Nasdaq Composite saw similar gains.
"We're getting an extension of the follow-through from yesterday," said Steve Goldman, chief market strategist at Weeden & Company. "We've had bond yields back off about 30 basis points in the past few weeks.
"As for sentiment from a short-term basis, everybody seems to be bearish on the market and that's positive for stocks," Goldman added. "It all adds up to a market that can discount the problems in the subprime area."
Eight of the ten S&P economic sectors closed higher with energy and technology stocks leading gains.
Caterpillar , which had been the biggest gainer in the Dow on Monday, was the biggest percentage loser after being downgraded by a UBS analyst. Just five Dow stocks closed lower, however, with gains led by tech bellwethers IBM and Intel.
The National Association of Realtors said pending home sales fell in May by 3.5%, showing further weakening in the housing market. The index showed a 3.2% decline in April.
Factory orders fell by a smaller-than-expected 0.5% in May. According to analysts surveyed by CNBC and Dow Jones, orders were expected to drop by 1.2% due to slowing sales in heavy machinery such as aircraft.
The major auto companies are also releasing their latest data on auto sales throughout the day. DaimlerChrysler's U.S. unit, Chrysler Group, posted a 1.4% decline in U.S. sales for June. Sales of the companies larger vehicles were hurt by higher gasoline prices. Ford said its June U.S. sales fell 8.1%.
The yield on the 10-year Treasury note held steady with rates hovering around 5%.
"I think inflation pressures are going to enough of a problem to work against the market and will force interest rates higher, but right now corporate profits look good enough and interest rates are still low enough that there still seems to be upside left for the market," said Peter Dunay, investment strategist at Leeb Group.
New York light sweet crude futures held above $71 a barrel.
In corporate news, Kraft Foods said it offered $7.2 billion in cash to acquire the biscuit division of French food company Groupe Danone. Danone said its board is considering the bid on an exclusive basis.
Private equity remained in the spotlight as the third meeting of a Treasury select committee got underway in London. The hearings will examine issues of taxation, transparency and regulation in the sector and include evidence from Blackstone, CVC Capital Partners and Duke Street Capital.
European Stocks Close Higher
European shares finished higher Tuesday, following rallies in the U.S. and Asia as merger and acquisition news brought in buyers.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX all closed higher.
In corporate news, shares in SAP fell as the software maker admitted its TomorrowNow unit made "inappropriate downloads" of documents belonging to Oracle, but said SAP had not used the confidential information.
Analysts told CNBC Europe that any long-term negativity should be limited for SAP, but the short-term effects to the company's image and marketing could be considerable.
And shares of Getronics soared as the Dutch computer services firm received a formal expression of interest from a U.S.-based firm and its board isconsidering a potential sale of the company.
Meanwhile, Scottish & Newcastle shares fell 0.8% at the open as the U.K.'s largest brewer said its first-half operating profit from its British business fell compared to the same half last year, but still hopes to meet its overall expectations.
And in the currency markets, the British pound soared to a 26-year high against the dollar and the euro hit an all-time high against the yen.
Asian markets rallied in the afternoon session Tuesday with South Korea closing almost 2% higher and Japan finishing its fourth straight session with gains. Investors snapped up exporters around the region following robust U.S. manufacturing data, while the mood across Asia was lifted by a fresh bout of U.S. takeover activity.
Tokyo's Nikkei 225 Average scraped higher to its fourth straight gain as shares of Olympus and other exporters gained after an index of U.S. manufacturing activity rose to its highest in more than a year, boosting confidence in the largest market for Japanese goods. Gains were limited, however, and market participants pointed to a lack of trading factors and low trade volume.
South Korea's Kospi Index gained nearly 2%, extending a rally helped by financial titles and shipping companies, with foreign investors turning net buyers on the back of Wall Street's gains.
Australia's S&P/ASX 200 Index rose 0.5% to a one-week closing high, drawing strength from the surge on Wall Street, with resource firms leading the rise on firmer base metal and oil prices. But Wesfarmers and Coles Group slumped on doubts about whether Wesfarmers would be able to turn around Coles' core supermarkets and liquor business quickly after an agreed A$20 billion (US$17 billion) bid
Chinese stocks were higher for a second day as investors bought large-caps such as Aluminum Corp. of China, spurred by positive news from major listed companies. But most stocks were down as traders remained wary due to a rising supply of
new shares, plans for heavy bond issuance and the arrival of the interim reporting season from July 1 to Aug. 31.
Hong Kong stocks jumped, buoyed by the U.S. rally and amid high hopes for an influx of mainland funds after a top Chinese bank said it would launch a second fund to channel client money into the city's equity market. China Shenhua Energy touched a record on its Shanghai listing plans while higher crude prices lifted oil stocks, sending the resource-heavy Hong Kong-listed China plays up over 2%.
Singapore's Straits Times Index advanced with gains in banks helping the market to stay in positive territory, even as property heavyweights dealt with concerns that the government may step in to cool property market.