Stocks eased off their best levels but still kicked off the first day of the third quarter with a modest rally, boosted by a pair of better-than-expected economic reports.
Traders said the S&P 500 was hitting an area of resistance around its 50-day moving average of 1,624. Meanwhile, protest in Egypt also put a damper on the rally.
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Major U.S. Indexes
The Dow Jones Industrial Average rose 65.36 points, to finish at 1,4974.96, led by United Tech and Travelers. The blue-chip index was up more than 170 points at its session high.
The climbed 8.68 points, to close at 1,614.96. And the Nasdaq jumped 31.24 points, to end at 3434.49.
The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, slipped near 16.
Most key S&P sectors were higher, led by materials and industrials, while utilities slipped.
Major averages closed higher for the quarter and the Dow posted its strongest first-half performance of the year since 1999. So far for the year, the Dow has surged more than 14 percent, while the S&P 500 and Nasdaq have spiked more than 13 percent each.
"History is a little bit in our favor—when you have a good first-half, the second half tends to show some follow through, but this may be a difficult year to figure out because we'll have the lag of sequestration, everyone trying to figure out where the Fed is going," said Art Cashin, director of floor operations at UBS Financial Services.
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On the economic front, manufacturing activity edged higher in June to 50.9, according to the Institute for Supply Management, a hair above expectations for 50.5. A reading above 50 indicates expansion in the sector. However, hiring in the sector fell to the lowest since September 2009.
And construction spending rose 0.5 percent in May to an annual rate of $874.9 billion, rising to its highest level in nearly four years, according to the Commerce Department.
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Japanese shares were boosted by a survey which showed corporate sentiment had turned positive for the first time in two years, as optimism about Prime Minister Shinzo Abe's radical stimulus policies offset concerns about recent market volatility.
"The risk is that the economy may be doing well enough that it actually dis-incentivizes the drive for structural reform. That would certainly lead to a dampening of market sentiment," said Alistair Newton, senior political analyst at Nomura.
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However, data from China showed that industrial activity continued to decline in June, amid concerns about overcapacity and weak demand.
"I think the story for China is basically that there is not any story left. Economic activity has peaked and we think that data will surprise on the downside," said Sailesh Jha, chief strategist at Arcus Capital Singapore.
Onyx Pharmaceuticals soared after the company confirmed it had rejected a purchase offer from Amgen to buy the company in a deal valued at about $10 billion. Canaccord Genuity lifted its price target on the stock to $140 from $105.
Among techs, Apple rallied after the tech giant filed for an "iWatch" trademark in Japan, implying that the company is working on developing a smartwatch. Separately, Raymond James raised its rating on the company to "strong buy" from "outperform."
Online radio provider Pandora jumped following a Morgan Stanley upgrade to "overweight" on belief that the company "pureplay exposure to the secular shift of radio dollars to online channels."
After the closing bell, Zynga confirmed that it would replace CEO Mark Pincus with Microsoft executive Don Mattrick. Zynga shares had surged in regular-hours trading following a report from AllThingsD.
BlackBerry slumped after several analysts downgraded the stock following the smartphone maker's disappointing quarterly results.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
Coming Up This Week:
TUESDAY: Factory orders, auto sales, Fed Board of Governors mtg; Earnings from Constellation Brands
WEDNESDAY: MBA mortgage applications, Challenger job-cut report, ADP employment report, international trade, ISM non-mfg index, oil inventories, natural gas inventories, NYSE early close at 1pm ET
THURSDAY: INDEPENDENCE DAY -- MARKETS CLOSED
FRIDAY: Employment situation, jobless claims, mid-year stress tests due
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