Stocks End Higher on M&A News, Strong Retail Sales

Stocks rose on Friday as surprisingly strong retail sales suggested consumer spending was holding up, while investors were encouraged by renewed mergers and acquisitions activity.

"After seeing yesterday's pullback and the pullback we had a couple of months ago, it seems that people are buying the pullbacks," said Joe Ranieri, head of Nasdaq trading at Canaccord Adams.

"There's just too much value in large caps and growth is starting to chase small and mid caps, so look for any kind of pullbacks to be buying opportunities," he said.

The Dow Jones Industrial Average closed with a gain of about 78 points, or 0.6%. The S&P 500 saw similar gains while the Nadasq Composite ended with up 1.2%, rebounding from a 1.4% drop in Thursday's session. For the week, the Dow rose just 0.2%, the S&P gained 0.3%, while the Nasdaq advanced 0.9%.

Shares of business software maker BEA Systems soared and were among the Nasdaq's top gainers, after Oracle proposed a takeover worth $6.66 billion. BEA rebuffed the $17 a share offer, calling it too low.

The rally in tech shares followed a sell-off on Thursday that ended four days of Nasdaq gains, which had pushed the index to its best level in nearly seven years.

A brighter outlook from McDonald's also contributed to Friday's modest gains. McDonald's forecast third-quarter earnings above the average Wall Street estimate as September same-store sales rose on strength in Asia, sending shares higher.

"When you look at (earnings) prospects, the days of looking at just at the domestic side are over. The vast majority of these companies' business is now being done overseas, so there are going to be markets for our goods, and the companies are going to do well," said Angel Mata, managing director of listed equity trading at Stifel Nicolaus Capital Markets in Baltimore.

Citigroup closed lower after a Deutsche Bank Securities analyst downgraded shares of the largest U.S. bank to "sell" from "buy," citing the need for a management shakeup amid lagging financial performance.

Elsewhere in the technology sector, Apple sharesrose 3% after the iPod maker's price target was lifted by Morgan Stanley.

In economic news, government data showed that retail sales rose more than expected last month despite worries the housing slump would cause consumers to keep a tight grip on their wallets. The retail report was one indication of consumer resiliency in a slowing economic growth environment.

U.S. Treasuries fell as as hopes dwindled for a Fed rate cut at the end of the month, while rebounding stocks sucked cash out of the safe-haven debt market.

In addition, the increase in the core Producer Price Index, which excludes volatile food and energy prices, was under control last month -- coming in at half the gain forecast by economists polled by Reuters.

But on the downside, shares of diversified manufacturer General Electric dropped after the company posted quarterly results in line with expectations. GE is the parent company of CNBC.

Oil briefly hit a record $84 a barrel on mounting tensions between Turkey and northern Iraq.

European shares traded firmly in the the red on Friday, while Asian stocks ended the week in negative territory, pulling back from record highs after a weeklong rally.