Banks, commodity stocks lift S&P 500 to five-year high

NEW YORK (Reuters) - Bank and commodity shares led the benchmark Standard & Poor's 500 Index to a fresh five-year closing high on Tuesday on hopes that the global economy continues to mend.

Travelers' shares climbed after the insurer's results and lifted the Dow Jones industrial average to a new five-year closing high.

On Friday, both the Dow and the S&P 500 ended at five-year highs after the quarterly earnings season got off to a solid start. On Monday, the U.S. stock market was closed in observance of the Martin Luther King, Jr., holiday.

In Tuesday's session, the market also gained on signals that Republican leaders in the U.S. House of Representatives aim on Wednesday to pass a bill to extend the U.S. debt limit by nearly four months to May 19. The White House welcomed the move, saying it would remove uncertainty about the issue.

Investors, however, were cautious ahead of an increase in earnings reports and as the S&P 500 rose for a fifth straight session.

Jack de Gan, chief investment officer of Harbor Advisory Corp, in Portsmouth, New Hampshire, said better economic numbers in the United States and China, as well as more stabilization in Europe, were driving buyers into sectors associated with economic growth.

"Any (bearish) news could turn us down for a day or so," he said, referring to the recent string of gains.

Freeport-McMoRan Copper & Gold led gains in the materials sector after it reported a 16 percent rise in fourth-quarter profit on higher production. Shares gained 4.6 percent to $35.19.

The Dow Jones industrial average <.dji> rose 62.51 points, or 0.46 percent, to 13,712.21 at the close. The S&P 500 <.spx> gained 6.58 points, or 0.44 percent, to 1,492.56. The Nasdaq Composite <.ixic> added 8.47 points or 0.27 percent, to 3,143.18.

Tuesday's session marked the highest closes for both the Dow and the S&P 500 since December 2007.

Technology shares underperformed as concerns about Apple's ability to continue to grow at hyper speed and a weak outlook from Intel Corp diminished optimism about the sector's prospects. The S&P technology index <.splrct> added 0.16 percent for the day. In comparison, the S&P energy sector index <.spny>, the S&P financials index <.spsy> and the S&P basic materials index <.splrcm> each gained 0.9 percent.

But Google shares rose 4.8 percent to above $736 in extended-hours trading after the world's No. 1 search engine reported a jump in fourth-quarter revenue. Shares of IBM added more than 4 percent to trade above $204 after the world's largest technology services company reported earnings and revenue that beat estimates.

"We expected Q4 for many tech vendors would be weak because we were expecting a lot of companies sitting on their wallets until it became clear what was going to become of the fiscal cliff," Forrester analyst Andrew Bartels said about IBM.

"Given the fact it's Q4 and the cloud of fiscal cliff within it, it's a positive indication that especially tech software will be doing better in the next couple of months."

During the regular session, shares of blue chips Travelers, DuPont

, and Verizon Communications rose following earnings.

Travelers rose 2.2 percent to $77.95, a closing high. DuPont's shares gained 1.8 percent to $47.82. Verizon's stock rose 0.9 percent to $42.94.

Thomson Reuters data through Tuesday morning showed that of the 74 S&P 500 companies that have reported earnings so far, 62.2 percent have topped expectations, roughly even with the 62 percent average since 1994, but below the 65 percent average over the past four quarters.

Overall, S&P 500 fourth-quarter earnings are forecast to have risen 2.6 percent. That estimate is above the 1.9 percent forecast from the start of earnings season, but well below the 9.9 percent fourth-quarter earnings forecast from October 1, the data showed.

U.S.-listed shares of Research in Motion rallied 13 percent to $17.90 a day after its chief executive said the Canadian company may consider strategic alliances with other companies after the launch of devices powered by RIM's new BlackBerry 10 operating system.

About 6.2 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, below last year's daily average of about 6.45 billion shares.

On the NYSE, advancers outnumbered decliners by a ratio of roughly 9 to 4. On the Nasdaq, five stocks rose for every three that fell.

Signs of improved sentiment toward world growth were also seen in European bond markets. The yield on Portugal's benchmark 10-year note fell below 6 percent for the first time since late 2010 on news that the country was set to tap the bond market this week for the first time since it was bailed out in 2011.

(Reporting by Rodrigo Campos; Additional reporting by Jennifer Saba; Editing by Jan Paschal)

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European shares test two-year highs, yen volatile before BOJ

LONDON (Reuters) - European shares inched towards two-year highs on Monday, as a political attempt to break a budget impasse in the United States and expectations of aggressive Japanese stimulus bolstered the appetite for shares.

U.S. House Republican leaders said on Friday they would seek to pass a three-month extension of federal borrowing authority in the coming days to buy time for the Democrat-controlled Senate to pass a plan to shrink budget deficits.

European shares <.fteu3> were supported by the news <.eu>, but with no clear response from the Democrats and a thin session expected due to a market holiday in the United States, the impact on assets such as bonds and commodities was limited.

By 1500 GMT London's FTSE 100 <.ftse>, Paris's CAC-40 <.fchi> and Frankfurt's DAX <.gdaxi> were up 0.4 to 0.6 percent, leaving the pan-European FTSEurofirst 300 within touching distance of a two-year high and MSCI's world index <.miwd00000pus> steady at a 20-month high. <.l><.eu/>

Expectations that the Bank of Japan will deliver a bold monetary easing plan at the end of its two-day meeting on Tuesday also supported shares and created choppy conditions in the currency market.

According to sources familiar with the BoJ's thinking, the government of new Prime Minister Shinzo Abe and the central bank have agreed to set 2 percent inflation as a new target, supplanting a softer 1 percent 'goal'.

The yen, which has fallen 13 percent against the dollar over the last two months as the shift in Japanese policy has taken shape, touched a new 2-1/2 year low in early trading but then firmed as traders cut short positions given the BOJ has often fallen short of market expectations.

"Investors are being mindful that the moves we have seen over the course of the last month or two are just worth locking in at least until we understand how the BOJ are really going to play in the future," said Jeremy Stretch, head of currency strategy at CIBC World Markets.

CURRENCY WARS

Japanese equities have surged in recent weeks in anticipation of a more aggressive monetary policy stance, but not everyone is happy.

The slump in the yen has prompted Russia's deputy central bank governor to warn of a new round of 'currency wars' and the medium-term risk of running ultra-loose monetary policies is likely to be a theme of the World Economic Forum in Davos, which opens on Wednesday.

With little in the way of economic data or debt issuance and U.S. markets shut for the Martin Luther King public holiday, the rest of the day was expected to be a fairly quiet for investors.

As the first European finance ministers' meeting of the year got under way, most euro zone government bonds were trading virtually flat and the euro was steady at $1.3316.

Market pressure on Europe is now less intense thanks to the European Central Bank's promise to prevent a collapse of the euro. Policymakers are set to discuss Cyprus's plight and plans for the euro zone's bailout fund to directly recapitalize banks.

French Finance Minister Pierre Moscovici said as he arrived at the Brussels meeting that a proper recapitalization strategy was very important.

"Negotiations will be complex, and a final decision is unlikely to emerge soon. Risks for sovereign spreads in the periphery should be limited, but we have some concerns that the long-term solution may fall short of what a real banking union needs," said UniCredit economist Marco Valli.

POLITICAL GAME

The efforts by Republican lawmakers to give the U.S. government leeway to pay its bills for another three months dented demand for safe haven assets and pushed German government bond yields near the top of this year's range.

The U.S. Treasury needs congressional authorization to raise the current $16.4 trillion limit on U.S. debt sometime between mid-February and early March. A failure to achieve that could lead to a debt default.

"This is part of the political game, it remains to be seen whether the Democrats will accept it," KBC strategist Piet Lammens said, adding that investors' working scenario was that a solution to raise the ceiling would be eventually found anyway.

One of the key factors that drove 2-year German yields higher last week was also the prospect of sizeable early repayments of the 1 trillion euros euro zone banks took from the ECB roughly a year ago.

The central bank will publish on Friday how much banks plan to return at the optional first repayment date on January 30. A Reuters poll on Monday showed around 100 billion euros are expected to be repaid although some predict it could be as high as 250 billion.

OIL OVERSUPPLY

German markets showed no reaction after the country's center-left opposition party edged Chancellor Angela Merkel's conservatives from power in a regional election on Sunday, reviving its flagging hopes for September's national election.

The Bundesbank's latest report delivered an upbeat message on the country's economy, saying a recent slump should be short-lived and may have already bottomed out.

Oil prices took their cues from a report in the United States at the end of last week that showed consumer sentiment at its weakest in a year as a result of the uncertainty surrounding the country's debt crisis.

Concerns about demand overshadowed supply disruption fears reinforced by the Islamist militant attack and hostage-taking at a gas plant in Algeria, a member of the Organization of Petroleum Exporting Countries.

Brent futures were down by 40 cents to $111.47 per barrel by mid-afternoon. U.S. crude shed 43 cents to $95.13 per barrel after touching a four-month high last week.

"The over-riding fundamental feeling in the market is that crude oil is over-supplied in 2013," said Tony Nunan, an oil risk manager at Mitsubishi.

Last week's data showing a pick-up in the Chinese economy helped keep growth-sensitive copper prices steady at roughly $8,056 an ounce. Gold, meanwhile, reversed Friday's losses to stand at $1,688 an ounce.

(Additional reporting by Sudip Kar-Gupta, Marious Zaharia and Anooja Debnath; Editing by Peter Graff)

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Euro zone surveys to offer hope as Japan eases

LONDON (Reuters) - The prospect of stronger European manufacturing surveys and decisive monetary easing in Japan this week ought to bolster confidence that the global economy can look forward to better days.

It is definitely not yet time to break open the champagne.

The index derived from polls of purchasing managers across the euro zone, though recovering, is likely to remain well below the 50 threshold that signals expansion.

If the Bank of Japan bows to political pressure and relaxes policy more boldly, it is because the country's noxious cocktail of a huge debt burden, deflation and dwindling external surpluses threatens an eventual fiscal crunch.

And an expected contraction in Britain's economy when fourth-quarter figures are released on Friday will be a reminder, as was Germany's grim end to 2013, that Europe has to dig itself out of a deep hole.

"The real hard economic data are still very negative," said Bert Colijn, an economist in Brussels with the Conference Board, a business research group. "There are improvements, but it still doesn't look that bright."

However, he said the economic news from the euro zone rim was not quite as troubling, and the mood was brightening among the core countries of the single currency area.

Lena Komileva, managing director of G+ Economics, a London consultancy, said it was hard to argue against investors' new-found appetite for riskier assets given that the volatility of equity prices was approaching historical lows and yields on corporate bonds had fallen sharply.

"Financial stress indicators signal a significant improvement in the health of the global economy," she said.

Friday's solid fourth-quarter economic data from China reinforced that view.

PURCHASERS' PROGRESS

Economists polled by Reuters expect an uptick in Thursday's advance purchasing managers' indexes for France and Germany as well as for the euro zone as a whole.

Germany's IFO business confidence survey on Friday is also projected to have risen for the third month in a row.

"The fact that business confidence measures are coming in more positive is a good sign," Colijn commented.

Commerzbank said its leading indicator for the German economy reached an all-time high in December after the European Central Bank's pledge to buy the bonds of troubled economies eased fears of a break-up of the euro.

"We assume that increasingly more companies are gaining confidence and viewing business prospects more positively," said Commerzbank economist Ralph Solveen.

BNP Paribas is also bullish on Germany and is looking for a marked pick-up in growth.

In addition to the ECB's safety net, the global manufacturing cycle is pointing up, while a strong labor market and easy financial conditions are supporting consumption, economists Evelyn Herrmann and Ken Wattret said in a report.

"Moreover, should the global economy surpass expectations and euro zone market stress ease further, upside surprises would be likely to follow. A key issue in this respect would be higher export growth and confidence triggering a stronger rebound in investment," they said.

That is exactly what Japan would like to see, too.

To that end, the government of new Prime Minister Shinzo Abe and the Bank of Japan have agreed to set 2 percent inflation as a new target, supplanting a softer 1 percent ‘goal', according to sources familiar with the central bank's thinking.

They said the BOJ, which meets on Monday and Tuesday, will also consider making an open-ended commitment to buy assets until the target is in sight.

FOR AND AGAINST EASING

Credit Suisse's global equity strategists said an easier monetary policy is justified to cushion the significant fiscal tightening on which Japan will have to embark before long to whittle down a government debt that has reached some 220 percent of national income.

This task is all the more pressing because Japan is moving towards a current account deficit, which will make it more reliant on foreign investors to finance its budget shortfall, Credit Suisse argued.

Trade figures on Thursday will underline the deterioration in Japan's external accounts, with economists polled by Reuters forecasting the sixth consecutive monthly deficit.

Nomura reckons the deficit for all of 2012 widened to 6.6 trillion yen ($73.4 billion) from 2.7 trillion in 2011.

Japanese equities have surged in anticipation of a more aggressive monetary policy stance, but not everyone is happy.

The accompanying slump in the yen has prompted Russia's deputy central bank governor to warn of a new round of ‘currency wars' and the medium-term risk of running ultra-loose monetary policies is likely to be a theme of the World Economic Forum in Davos, which opens on Wednesday.

"I'm pretty worried about the new policies of Japan's newly elected government," German Finance Minister Wolfgang Schaeuble said last week. "When you think of the surplus of liquidity on global financial markets, it is fuelled further by a wrong understanding of central bank policy.

(Editing by Susan Fenton)

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Wall Street Week Ahead: Earnings, money flows to push stocks higher

NEW YORK (Reuters) - With earnings momentum on the rise, the S&P 500 seems to have few hurdles ahead as it continues to power higher, its all-time high a not-so-distant goal.

The U.S. equity benchmark closed the week at a fresh five-year high on strong housing and labor market data and a string of earnings that beat lowered expectations.

Sector indexes in transportation <.djt>, banks <.bkx> and housing <.hgx> this week hit historic or multiyear highs as well.

Michael Yoshikami, chief executive at Destination Wealth Management in Walnut Creek, California, said the key earnings to watch for next week will come from cyclical companies. United Technologies reports on Wednesday while Honeywell is due to report Friday.

"Those kind of numbers will tell you the trajectory the economy is taking," Yoshikami said.

Major technology companies also report next week, but the bar for the sector has been lowered even further.

Chipmakers like Advanced Micro Devices , which is due Tuesday, are expected to underperform as PC sales shrink. AMD shares fell more than 10 percent Friday after disappointing results from its larger competitor, Intel . Still, a chipmaker sector index <.sox> posted its highest weekly close since last April.

Following a recent underperformance, an upside surprise from Apple on Wednesday could trigger a return to the stock from many investors who had abandoned ship.

Other major companies reporting next week include Google , IBM , Johnson & Johnson and DuPont on Tuesday, Microsoft and 3M on Thursday and Procter & Gamble on Friday.

CASH POURING IN, HOUSING DATA COULD HELP

Perhaps the strongest support for equities will come from the flow of cash from fixed income funds to stocks.

The recent piling into stock funds -- $11.3 billion in the past two weeks, the most since 2000 -- indicates a riskier approach to investing from retail investors looking for yield.

"From a yield perspective, a lot of stocks still yield a great deal of money and so it is very easy to see why money is pouring into the stock market," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

"You are just not going to see people put a lot of money to work in a 10-year Treasury that yields 1.8 percent."

Housing stocks <.hgx>, already at a 5-1/2 year high, could get a further bump next week as investors eye data expected to support the market's perception that housing is the sluggish U.S. economy's bright spot.

Home resales are expected to have risen 0.6 percent in December, data is expected to show on Tuesday. Pending home sales contracts, which lead actual sales by a month or two, hit a 2-1/2 year high in November.

The new home sales report on Friday is expected to show a 2.1 percent increase.

The federal debt ceiling negotiations, a nagging worry for investors, seemed to be stuck on the back burner after House Republicans signaled they might support a short-term extension.

Equity markets, which tumbled in 2011 after the last round of talks pushed the United States close to a default, seem not to care much this time around.

The CBOE volatility index <.vix>, a gauge of market anxiety, closed Friday at its lowest since April 2007.

"I think the market is getting somewhat desensitized from political drama given, this seems to be happening over and over," said Destination Wealth Management's Yoshikami.

"It's something to keep in mind, but I don't think it's what you want to base your investing decisions on."

(Reporting by Rodrigo Campos, additional reporting by Chuck Mikolajczak and Caroline Valetkevitch; Editing by Kenneth Barry)

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Wall Street Week Ahead: Earnings, money flows to push stocks higher

NEW YORK (Reuters) - With earnings momentum on the rise, the S&P 500 seems to have few hurdles ahead as it continues to power higher, its all-time high a not-so-distant goal.

The U.S. equity benchmark closed the week at a fresh five-year high on strong housing and labor market data and a string of earnings that beat lowered expectations.

Sector indexes in transportation <.djt>, banks <.bkx> and housing <.hgx> this week hit historic or multiyear highs as well.

Michael Yoshikami, chief executive at Destination Wealth Management in Walnut Creek, California, said the key earnings to watch for next week will come from cyclical companies. United Technologies reports on Wednesday while Honeywell is due to report Friday.

"Those kind of numbers will tell you the trajectory the economy is taking," Yoshikami said.

Major technology companies also report next week, but the bar for the sector has been lowered even further.

Chipmakers like Advanced Micro Devices , which is due Tuesday, are expected to underperform as PC sales shrink. AMD shares fell more than 10 percent Friday after disappointing results from its larger competitor, Intel . Still, a chipmaker sector index <.sox> posted its highest weekly close since last April.

Following a recent underperformance, an upside surprise from Apple on Wednesday could trigger a return to the stock from many investors who had abandoned ship.

Other major companies reporting next week include Google , IBM , Johnson & Johnson and DuPont on Tuesday, Microsoft and 3M on Thursday and Procter & Gamble on Friday.

CASH POURING IN, HOUSING DATA COULD HELP

Perhaps the strongest support for equities will come from the flow of cash from fixed income funds to stocks.

The recent piling into stock funds -- $11.3 billion in the past two weeks, the most since 2000 -- indicates a riskier approach to investing from retail investors looking for yield.

"From a yield perspective, a lot of stocks still yield a great deal of money and so it is very easy to see why money is pouring into the stock market," said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

"You are just not going to see people put a lot of money to work in a 10-year Treasury that yields 1.8 percent."

Housing stocks <.hgx>, already at a 5-1/2 year high, could get a further bump next week as investors eye data expected to support the market's perception that housing is the sluggish U.S. economy's bright spot.

Home resales are expected to have risen 0.6 percent in December, data is expected to show on Tuesday. Pending home sales contracts, which lead actual sales by a month or two, hit a 2-1/2 year high in November.

The new home sales report on Friday is expected to show a 2.1 percent increase.

The federal debt ceiling negotiations, a nagging worry for investors, seemed to be stuck on the back burner after House Republicans signaled they might support a short-term extension.

Equity markets, which tumbled in 2011 after the last round of talks pushed the United States close to a default, seem not to care much this time around.

The CBOE volatility index <.vix>, a gauge of market anxiety, closed Friday at its lowest since April 2007.

"I think the market is getting somewhat desensitized from political drama given, this seems to be happening over and over," said Destination Wealth Management's Yoshikami.

"It's something to keep in mind, but I don't think it's what you want to base your investing decisions on."

(Reporting by Rodrigo Campos, additional reporting by Chuck Mikolajczak and Caroline Valetkevitch; Editing by Kenneth Barry)

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Housing, job data push S&P to five-year high; Intel down late

NEW YORK (Reuters) - Stronger-than-expected data on housing starts and jobless claims lit a fire under stocks on Thursday, pushing the S&P 500 to a five-year high and its third day of gains.

A pair of economic reports lifted investors' sentiment. The number of Americans filing new claims for unemployment benefits fell to a five-year low last week and housing starts jumped last month to the highest since June 2008.

Strength in the housing and labor markets is key to sustained growth and higher corporate profits, helping to bring out buyers even on a day when earnings reports were mixed.

Gains were tempered by weakness in the financial sector, with Bank of America down 4.2 percent to $11.28 and Citigroup off 2.9 percent to $41.24 after their results.

In other negative earnings news, shares of chipmaker Intel fell 5.2 percent to $21.49 in extended-hours trading after the company forecast quarterly revenue that fell short of analysts' expectations. Intel had ended the regular session up 2.6 percent at $22.68.

The S&P 500 ended at its highest since December 2007 and now sits just 5.6 percent from its all-time closing high of 1,565.15.

"Having consolidated really for the last two weeks, the fact that we broke out, I think that that is sucking in quite a bit of money," said James Dailey, portfolio manager of TEAM Asset Strategy Fund in Harrisburg, Pennsylvania.

The Dow Jones industrial average <.dji> was up 84.79 points, or 0.63 percent, at 13,596.02. The Standard & Poor's 500 Index <.spx> was up 8.31 points, or 0.56 percent, at 1,480.94. The Nasdaq Composite Index <.ixic> was up 18.46 points, or 0.59 percent, at 3,136.00.

Better-than-expected earnings and revenue reported by online marketplace eBay late Wednesday helped the stock gain 2.7 percent to $54.33.

In the housing sector, PulteGroup Inc shares gained 4.9 percent to $20.29 and Toll Brothers Inc advanced 3.1 percent to $35.99. The PHLX housing sector index <.hgx> climbed 2.4 percent, reaching its highest close since August 2007.

Semiconductor shares <.sox> rose 2 percent to the highest close in eight months.

Financials were the only S&P 500 sector to register a slight decline for the day.

Bank of America's fourth-quarter profit fell as it took more charges to clean up mortgage-related problems. Citigroup posted $2.32 billion of charges for layoffs and lawsuits.

Energy shares led gains on the Dow as U.S. crude oil prices jumped more than 1 percent. Shares of Exxon Mobil were up 0.8 percent at $90.20 while shares of Chevron were up 0.7 percent at $114.75.

S&P 500 earnings are expected to have risen 2.3 percent in the fourth quarter, Thomson Reuters data showed. Expectations for the quarter have fallen considerably since October when a 9.9 percent gain was estimated.

Volume was roughly 6.5 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the 2012 average daily closing volume of about 6.45 billion.

Advancers outpaced decliners on the NYSE by about 22 to 7 and on the Nasdaq by about 2 to 1.

(Additional reporting by Chuck Mikolajczak; Editing by Kenneth Barry and Nick Zieminski)

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S&P 500 ends flat as bank profits temper growth concerns

NEW YORK (Reuters) - The S&P 500 ended nearly flat on Wednesday as solid earnings from two major banks and a bounceback in Apple shares offset concerns about a lower forecast for global growth in 2013.

Shares of Goldman Sachs hit their highest since May 2011 as earnings nearly tripled on increased revenue from dealmaking and lower compensation expenses. JPMorgan Chase said fourth-quarter net income jumped 53 percent and earnings for 2012 set a record.

JPMorgan shares rose 1 percent to $46.82, while Goldman climbed 4.1 percent to $141.09.

They were among the first big banks to report results and helped to lift estimates for S&P 500 corporate earnings slightly, to a 2.2 percent gain, Thomson Reuters data showed.

"Pretty solid numbers from both JPMorgan and Goldman Sachs are putting a lot of momentum behind the financials, with a lot more names to report this week. But I think that's helping to put a better bid to the market overall," said Michael James, senior trader at Wedbush Morgan in Los Angeles.

Apple rebounded after three days of losses, helping the Nasdaq outperform the S&P 500 and Dow. Apple rose 4.2 percent to $506.09. It closed below $500 on Tuesday for the first time since February.

"There could not have been more negativity around Apple going into today. So was it due for an oversold bounce on a trading basis? Absolutely," James said.

A slow economic recovery in developed nations is holding back the global economy, the World Bank said on Tuesday, as it sharply scaled back its forecast for world growth in 2013 to 2.4 percent from an earlier forecast of 3.0 percent.

The Dow Jones industrial average <.dji> was down 23.66 points, or 0.17 percent, at 13,511.23. The Standard & Poor's 500 Index <.spx> was up 0.29 points, or 0.02 percent, at 1,472.63. The Nasdaq Composite Index <.ixic> was up 6.77 points, or 0.22 percent, at 3,117.54.

The biggest drag on the Dow was Boeing , whose shares fell 3.4 percent to $74.34 on concerns about its new Dreamliner passenger jets. Japan's two leading airlines grounded their fleets of 787s after an emergency landing, adding to safety concerns triggered by a series of recent incidents.

After the bell, shares of eBay were trading up 0.7 at $53.28, reversing an initial decline following the release of its results. Also after the close, shares of CBS rose 8.3 percent to $41.10 after it said it will convert its Outdoor Americas division into a real estate investment trust. [ID:nL4N0AL98X]

Earlier in the day, U.S. economic data showed consumer prices were flat in December, pointing to muted inflation pressures that should give the Federal Reserve room to prop up the economy by staying on its ultra-easy monetary policy path.

Other data showed U.S. homebuilder confidence in the market for single family homes held steady near seven year highs in January, suggesting the outlook for the housing market remained upbeat.

Volume was roughly 5.6 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the 2012 average daily closing volume of about 6.45 billion.

Decliners outpaced advancers on the NYSE by nearly 8 to 7 and on the Nasdaq by almost 7 to 5.

(Additional reporting by Chuck Mikolajczak; Editing by Nick Zieminski and Kenneth Barry)

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Dow, S&P 500 inch up with retailers but Apple drags again

NEW YORK (Reuters) - The Dow and S&P 500 edged higher on Tuesday after stronger-than-expected retail data, though tech heavyweight Apple dragged on the market for a third day.

Apple was the biggest weight on both the S&P 500 and Nasdaq 100 <.ndx> after reports on Monday of cuts to orders for iPhone parts. Shares declined 3.2 percent to $485.92 and closed below $500 for the first time since February.

Retail stocks advanced after a government report showing retail sales rose more than expected in December was seen as a favorable sign for fourth-quarter growth. A separate report showed manufacturing activity in New York state contracted for the sixth month in a row in January.

"A little better-than-expected news on retail sales once again reinforces that the consumer remains alive and reasonably well," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia, which manages about $54 billion in assets.

Among retailers, American Eagle Outfitters Inc gained 4.8 percent to $20.58 and Gap Inc rose 3.4 percent to $32.46. The Morgan Stanley retail index <.mvr> advanced 1.5 percent.

Express Inc surged 23.8 percent to $17.40 after the apparel retailer raised its fourth-quarter and full year 2012 outlook.

The Dow Jones industrial average <.dji> was up 27.57 points, or 0.20 percent, at 13,534.89. The Standard & Poor's 500 Index <.spx> was up 1.66 points, or 0.11 percent, at 1,472.34. The Nasdaq Composite Index <.ixic> was down 6.72 points, or 0.22 percent, at 3,110.78.

Apple's stock has lost about 7 percent in the last three sessions and is down 8.7 percent since the start of the year.

"It's tough to discern exactly what's putting the pressure on it. But at the end of the day, its influence, considering it's still 3 1/2 to 4 percent of the S&P 500 index, is being felt," Luschini said.

"I attribute (it) to just some of the bloom coming off of the rose. They haven't necessarily done anything wrong, as much as others have caught up."

Also keeping investors on edge is the looming debt ceiling debate. On Monday, President Barack Obama rejected any negotiations with Republicans over raising the U.S. debt ceiling. The United States could default on its debt if Congress does not increase the borrowing limit.

Resolving the debt ceiling is more a question of how than if. Investors don't expect a U.S. default, but they are also wary of another eleventh-hour agreement like the one in August 2011.

An expected lackluster earnings season, too, kept investors from taking aggressive bets. Analyst estimates for the quarter have fallen sharply since October. S&P 500 earnings growth is now seen up just 1.8 percent from a year ago, Thomson Reuters data showed.

Homebuilder Lennar reported a sharp rise in quarterly profit, but the stock declined 0.8 percent to $40.68 on worries that growth in orders was slowing.

Dell Inc shares added to Monday's gains, ending up 7.2 percent to $13.17 after sources said talks to take the computer maker private are in an advanced stage.

On the down side, shares of Facebook dropped 2.7 percent to $30.10. The company unveiled a "graph search" feature that CEO Mark Zuckerberg said would help its billion-plus users sort through content within the social network and its content feeds.

Volume was roughly 5.8 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the 2012 average daily closing volume of about 6.45 billion.

Advancers outpaced decliners on the NYSE by about 17 to 12 and on the Nasdaq by about 13 to 11.

(Additional reporting by Chuck Mikolajczak; Editing by Kenneth Barry and Nick Zieminski)

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Apple drags on S&P, Nasdaq; Dell jumps after report

NEW YORK (Reuters) - The S&P 500 and Nasdaq ended lower on Monday as worries over demand for Apple products drove down its shares and investors braced for earnings disappointments.

Running counter to that was Dell Inc's stock which jumped 13 percent to about a five-month high at $12.29 after Bloomberg reported the No. 3 personal computer maker is in talks with private equity firms to go private. Dell's gains offset some tech-sector weakness.

Tech heavyweight Apple lost 3.6 percent to $501.75 and was the biggest weight on both the S&P 500 and Nasdaq 100 <.ndx> indexes after reports the company has cut orders for LCD screens and other parts for the iPhone 5 this quarter due to weak demand. The stock hit a session low of $498.51, the first dip below $500 since February 16.

"With Apple, it seems as if the sentiment has shifted from this being the one stock that everybody wanted to own to people beginning to look at it as a company (whose) business is slowing down somewhat," said Eric Kuby, chief investment officer of North Star Investment Management Corp in Chicago.

Adding to investor unease, fourth-quarter earnings kick into high gear this week. Analyst estimates for the quarter have fallen sharply since October. S&P 500 earnings growth is now seen up just 1.9 percent from a year ago, Thomson Reuters data showed.

The Dow Jones industrial average <.dji> was up 18.89 points, or 0.14 percent, at 13,507.32. The Standard & Poor's 500 Index <.spx> was down 1.37 points, or 0.09 percent, at 1,470.68. The Nasdaq Composite Index <.ixic> was down 8.13 points, or 0.26 percent, at 3,117.50.

Apple suppliers also lost ground, with Cirrus Logic off 9.4 percent at $28.62 and Qualcomm down 1 percent at $64.24.

The Dow fared better than the other two indexes, helped in part by Hewlett-Packard shares, which rose 4.9 percent to $16.95. The stock, up early in the session after JPMorgan upgraded its rating on the shares and raised its price target to $21 from $15, added to gains following the Dell report.

Tech has "become the arena for private equity or other capital-restructuring type of maneuvers because of the way their valuations and their balance sheets are," Kuby said.

Appliance and electronics retailer Hhgregg Inc slumped 5.7 percent to $7.44 after the company cut its same-store sales forecast for the full year.

Earnings reports are due this week from Goldman Sachs , Bank of America , Intel and General Electric , among other companies. Third-quarter reports ended with a gain of just 0.1 percent, the worst for an S&P 500 profit period in three years, according to Thomson Reuters data.

President Barack Obama warned Congress at a news conference on Monday that a refusal to raise the U.S. debt ceiling next month could mean a government shutdown and trigger economic chaos.

S&P futures had little reaction to comments after the bell by Federal Reserve Chairman Ben Bernanke, who urged lawmakers to lift the country's borrowing limit to avoid a debt default.

Volume was roughly 5.6 billion shares traded on the New York Stock Exchange, the Nasdaq and the NYSE MKT, compared with the 2012 average daily closing volume of about 6.45 billion.

Decliners were about even with advancers on the NYSE while decliners outpaced advancers on the Nasdaq by about 12 to 11.

(Additional reporting by Chuck Mikolajczak; Editing by Kenneth Barry, Nick Zieminski and Andrew Hay)

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Getting comfortable with living on the edge

LONDON (Reuters) - Just as you learn to put up with a nagging toothache, this week is expected to provide fresh evidence that the U.S. economy is getting used to life on the edge of the fiscal cliff.

Of course, putting off that trip to the dentist is not necessarily wise. The longer Washington delays, the more painful it will become to narrow its gaping budget deficit.

But surveys of U.S. consumer confidence in January and of house builder sentiment in December are likely to show resilience, buttressing the argument of equity bulls that Wall Street's firm start to the year is more than a relief rally or a desperate search for higher returns on investment.

Bluford Puttnam, chief economist of CME Group, said the U.S. economy had managed to grow almost 2 percent last year and create about 1.8 million jobs despite stagnation in Europe, a slowdown in China and the deadlocked budget talks.

"So I see a lot of momentum going into 2013," Puttnam said. "If we can get past this fiscal cliff, the economy is poised to have a much more confident year."

Despite fiscal tightening, he said growth could reach 2.5 percent to 3.0 percent.

Puttnam said the next rounds in the budget battle later this quarter would again be bitterly fought and the resolution would again satisfy no one. But, as with the showdown at the end of 2012, the economy would quickly move on.

"There is a one-in-ten chance that the government may even shut down for a week. It's just going to be ugly. And then it will be over. There will be some kind of compromise, and by April it will fade quickly into the background," he said.

THREE GORGES

U.S. retail sales are likely to have increased only 0.2 percent in December, dampened by the budget worries, according to economists polled by Reuters.

But a pair of regional Federal Reserve surveys and the monthly Reuters/University of Michigan consumer poll are projected to improve, while housing starts, new building permits and builders' confidence should all show that the housing recovery stands on firm foundations.

"That's what's really encouraging consumers to feel that the economy is getting better and that the momentum is broadly positive," said Jerry Webman, chief economist at OppenheimerFunds in New York.

While the phrase fiscal cliff used by U.S. Federal Reserve chief Ben Bernanke conjured up an image of an immediate plunge at the start of this year, in truth any austerity was always likely to take effect on the economy gradually.

Bank of America Merrill Lynch describes the challenges the United States faces in coming months rather as three fiscal gorges it must leap over.

The government could hit the debt ceiling approved by Congress as early as mid-February; across-the-board spending cuts are due to kick in on March 1; and the ‘continuing resolution' to fund all discretionary government spending expires on March 27.

Ideally, investors would like Democrats and Republicans to resolve all three issues with an overarching agreement to slash the deficit by $4 trillion over the next decade.

Instead, given the dysfunctional state of politics, Webman said the best that could be hoped for was another short-term fix that cuts spending and ends some tax breaks.

"The U.S. doesn't move by grand bargains, by big deals. We move by incremental decisions, and I think we'll make some imperfect but improved decisions over the course of 2013," he said.

CHINA ON THE MEND, EUROPE EERILY CALM

Encouraging economic news from China, including stronger-than-expected exports and imports in December, has also supported the start-of-year move by financial market investors out of cash and into riskier assets.

Figures on Friday are expected to show that the world's second-largest economy grew 7.8 percent from a year earlier, rebounding from the 7.4 percent pace of the third quarter and further allaying fears of a hard landing.

"Given some of the bearish commentary on China a few months ago, this should be a relief for markets and it's good for the world economy," said Derry Pickford, macro analyst at investment managers Ashburton in London.

Continuing calm in the euro zone has also helped equities, even though full-year German GDP data on Tuesday will serve as a reminder of the area's economic malaise.

Europe's largest economy contracted last quarter as factories slashed output in response to weak demand from Germany's neighbors, the Economy Ministry said on Friday.

At a news conference a day earlier, European Central Bank President Mario Draghi said he expected a recovery in euro zone growth later this year. But he ruled out an early end to the ECB's crisis policy measures and cautioned that risks were still tilted to the downside. Markets shrugged.

In Europe as in the United States, investors seem to have got used to high levels of policy uncertainty, said Ethan Harris, chief U.S. economist at Bank of America Merrill Lynch.

"It appears that the markets will look past brinkmanship moments unless policy makers break new ground," he said.

In Europe, that might mean not just threatening to eject Greece from the euro zone but actually forcing the exit. In the United States, that might mean not just threatening to violate the debt ceiling but actually doing so, Harris said in a report.

As long as such extreme events do not occur, Harris expects periodic swoons in confidence but no acute crisis.

"This renewed resilience is important because we expect many brinkmanship moments in the months ahead. A now-regular pattern has been established where deals are only struck at the last minute and often under market pressure," he wrote.

(Editing by Patrick Graham)

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Wall Street Week Ahead: Attention turns to financial earnings

NEW YORK (Reuters) - After over a month of watching Capitol Hill and Pennsylvania Avenue, Wall Street can get back to what it knows best: Wall Street.

The first full week of earnings season is dominated by the financial sector - big investment banks and commercial banks - just as retail investors, free from the "fiscal cliff" worries, have started to get back into the markets.

Equities have risen in the new year, rallying after the initial resolution of the fiscal cliff in Washington on January 2. The S&P 500 on Friday closed its second straight week of gains, leaving it just fractionally off a five-year closing high hit on Thursday.

An array of financial companies - including Goldman Sachs and JPMorgan Chase - will report on Wednesday. Bank of America and Citigroup will join on Thursday.

"The banks have a read on the economy, on the health of consumers, on the health of demand," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

"What we're looking for is demand. Demand from small business owners, from consumers."

EARNINGS AND ECONOMIC EXPECTATIONS

Investors were greeted with a slightly better-than-anticipated first week of earnings, but expectations were low and just a few companies reported results.

Fourth quarter earnings and revenues for S&P 500 companies are both expected to have grown by 1.9 percent in the past quarter, according to Thomson Reuters I/B/E/S.

Few large corporations have reported, with Wells Fargo the first bank out of the gate on Friday, posting a record profit. The bank, however, made fewer mortgage loans than in the third quarter and its shares were down 0.8 percent for the day.

The KBW bank index <.bkx>, a gauge of U.S. bank stocks, is up about 30 percent from a low hit in June, rising in six of the last eight months, including January.

Investors will continue to watch earnings on Friday, as General Electric will round out the week after Intel's report on Thursday.

HOUSING, INDUSTRIAL DATA ON TAP

Next week will also feature the release of a wide range of economic data.

Tuesday will see the release of retail sales numbers and the Empire State manufacturing index, followed by CPI data on Wednesday.

Investors and analysts will also focus on the housing starts numbers and the Philadelphia Federal Reserve factory activity index on Thursday. The Thomson Reuters/University of Michigan consumer sentiment numbers are due on Friday.

Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, said he expected to see housing numbers continue to climb.

"They won't be that surprising if they're good, they'll be rather eye-catching if they're not good," he said. "The underlying drive of the markets, I think, is economic data. That's been the catalyst."

POLITICAL ANXIETY

Worries about the protracted fiscal cliff negotiations drove the markets in the weeks before the ultimate January 2 resolution, but fear of the debt ceiling fight has yet to command investors' attention to the same extent.

The agreement was likely part of the reason for a rebound in flows to stocks. U.S.-based stock mutual funds gained $7.53 billion after the cliff resolution in the week ending January 9, the most in a week since May 2001, according to Thomson Reuters' Lipper.

Markets are unlikely to move on debt ceiling news unless prominent lawmakers signal that they are taking a surprising position in the debate.

The deal in Washington to avert the cliff set up another debt battle, which will play out in coming months alongside spending debates. But this alarm has been sounded before.

"The market will turn the corner on it when the debate heats up," Prudential Financial's Krosby said.

The CBOE Volatility index <.vix> a gauge of traders' anxiety, is off more than 25 percent so far this month and it recently hit its lowest since June 2007, before the recession began.

"The market doesn't react to the same news twice. It will have to be more brutal than the fiscal cliff," Krosby said. "The market has been conditioned that, at the end, they come up with an agreement."

(Reporting by Gabriel Debenedetti; editing by Rodrigo Campos)

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Wall Street Week Ahead: Attention turns to financial earnings

NEW YORK (Reuters) - After over a month of watching Capitol Hill and Pennsylvania Avenue, Wall Street can get back to what it knows best: Wall Street.

The first full week of earnings season is dominated by the financial sector - big investment banks and commercial banks - just as retail investors, free from the "fiscal cliff" worries, have started to get back into the markets.

Equities have risen in the new year, rallying after the initial resolution of the fiscal cliff in Washington on January 2. The S&P 500 on Friday closed its second straight week of gains, leaving it just fractionally off a five-year closing high hit on Thursday.

An array of financial companies - including Goldman Sachs and JPMorgan Chase - will report on Wednesday. Bank of America and Citigroup will join on Thursday.

"The banks have a read on the economy, on the health of consumers, on the health of demand," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey.

"What we're looking for is demand. Demand from small business owners, from consumers."

EARNINGS AND ECONOMIC EXPECTATIONS

Investors were greeted with a slightly better-than-anticipated first week of earnings, but expectations were low and just a few companies reported results.

Fourth quarter earnings and revenues for S&P 500 companies are both expected to have grown by 1.9 percent in the past quarter, according to Thomson Reuters I/B/E/S.

Few large corporations have reported, with Wells Fargo the first bank out of the gate on Friday, posting a record profit. The bank, however, made fewer mortgage loans than in the third quarter and its shares were down 0.8 percent for the day.

The KBW bank index <.bkx>, a gauge of U.S. bank stocks, is up about 30 percent from a low hit in June, rising in six of the last eight months, including January.

Investors will continue to watch earnings on Friday, as General Electric will round out the week after Intel's report on Thursday.

HOUSING, INDUSTRIAL DATA ON TAP

Next week will also feature the release of a wide range of economic data.

Tuesday will see the release of retail sales numbers and the Empire State manufacturing index, followed by CPI data on Wednesday.

Investors and analysts will also focus on the housing starts numbers and the Philadelphia Federal Reserve factory activity index on Thursday. The Thomson Reuters/University of Michigan consumer sentiment numbers are due on Friday.

Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, said he expected to see housing numbers continue to climb.

"They won't be that surprising if they're good, they'll be rather eye-catching if they're not good," he said. "The underlying drive of the markets, I think, is economic data. That's been the catalyst."

POLITICAL ANXIETY

Worries about the protracted fiscal cliff negotiations drove the markets in the weeks before the ultimate January 2 resolution, but fear of the debt ceiling fight has yet to command investors' attention to the same extent.

The agreement was likely part of the reason for a rebound in flows to stocks. U.S.-based stock mutual funds gained $7.53 billion after the cliff resolution in the week ending January 9, the most in a week since May 2001, according to Thomson Reuters' Lipper.

Markets are unlikely to move on debt ceiling news unless prominent lawmakers signal that they are taking a surprising position in the debate.

The deal in Washington to avert the cliff set up another debt battle, which will play out in coming months alongside spending debates. But this alarm has been sounded before.

"The market will turn the corner on it when the debate heats up," Prudential Financial's Krosby said.

The CBOE Volatility index <.vix> a gauge of traders' anxiety, is off more than 25 percent so far this month and it recently hit its lowest since June 2007, before the recession began.

"The market doesn't react to the same news twice. It will have to be more brutal than the fiscal cliff," Krosby said. "The market has been conditioned that, at the end, they come up with an agreement."

(Reporting by Gabriel Debenedetti; editing by Rodrigo Campos)

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Wall Street climbs as China data puts S&P back at five-year high

NEW YORK (Reuters) - Stocks rose on Thursday and the S&P 500 ended at a fresh five-year high as stronger-than-expected exports from China spurred optimism about global growth prospects.

Buying accelerated late in the day after the S&P 500 broke through technical resistance at 1,466.47, which was the market's closing level last Friday and the highest level since December 2007.

"Historically, January is a positive month for the market and you're seeing that play out," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

Financial and energy stocks were the day's top gainers. The financial sector index <.gspf> rose 1.4 percent and the energy sector <.gspe> was up 1 percent.

Analysts cited economic data out of China as the day's catalyst, which showed the country's export growth rebounded sharply to a seven-month high in December, a strong finish to the year after seven straight quarters of slowdown.

"It is being interpreted positively that they've stopped the downturn (in growth)," said Kurt Brunner, portfolio manager at Swarthmore Group in Philadelphia.

"If they continue to produce good growth, that's going to be supportive of our global manufacturers."

Wall Street's fear gauge, the CBOE Volatility Index <.vix> suggested markets were relatively calm. The VIX was down 2.3 percent at 13.49.

At Thursday's close, the S&P sits about 6 percent below its all-time closing high of 1,565.15, hit in October 2007.

The Dow Jones industrial average <.dji> gained 80.71 points, or 0.60 percent, to 13,471.22. The Standard & Poor's 500 Index <.spx> rose 11.10 points, or 0.76 percent, to 1,472.12. The Nasdaq Composite Index <.ixic> added 15.95 points, or 0.51 percent, to 3,121.76.

Thursday's session had earlier included a dip that traders said was triggered by a trade in the options market that prompted a large amount of S&P futures to hit the market at the same time. That sent the S&P 500 index down rapidly but those losses were reversed through the afternoon.

Financials benefited from events this week that added clarity to mortgage rules and banks' potential exposure to the housing market.

The U.S. government's consumer finance watchdog announced mortgage rules on Thursday that will force banks to use new criteria to determine whether a borrower can repay a home loan.

Earlier this week, several big mortgage lenders reached a deal with regulators to end a review of foreclosures mandated by the government.

"It's a resolution. It's not hanging over their heads," said Brunner.

Bank of America gained 3.1 percent to $11.78, while Morgan Stanley was up 3.7 percent at $20.34, one day after sources said the bank plans to cut jobs.

Shares of upscale jeweler Tiffany dropped 4.5 percent to $60.40 after it said sales were flat during the holidays.

Herbalife Ltd stepped up its defense against activist investor Bill Ackman, stressing it was a legitimate company with a mission to improve nutrition and help public health. The stock ended down 1.8 percent at $39.24 after a volatile day.

After the closing bell, American Express said it would cut about 5,400 jobs, and take about $600 million in after-tax charges in the fourth quarter. The stock added 0.7 percent to $61.20 in after-hours trade.

Volume was above the 2012 average of 6.42 billion shares traded a day, with roughly 6.77 billion shares changing hands on the New York Stock Exchange, the Nasdaq and the NYSE MKT.

Advancers outnumbered decliners on the NYSE by 1,916 to 1,039, while advancers also outpaced decliners on the Nasdaq by 1,439 to 1,036.

(Editing by Nick Zieminski)

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Wall Street rises after Alcoa reports earnings

NEW YORK (Reuters) - Stocks rose on Wednesday, rebounding from two days of losses, as investors turned their focus to the first prominent results of the earnings season.

Stocks had retreated at the start of the week from the S&P 500's highest point in five years, hit last Friday, on worries about possible earnings weakness.

Shares of Alcoa Inc were down 0.5 percent to $9.08 after early gains, following the company's earnings release after the bell on Tuesday. The largest U.S. aluminum producer said it expects global demand for aluminum to grow in 2013.

Herbalife Ltd stock rose 4.2 percent to $39.95 in its most active day of trading in the company's history after hedge fund manager Dan Loeb took a large stake in the nutritional supplements seller. Prominent short-seller Bill Ackman had previously accused the company of being a "pyramid scheme," which Herbalife has denied.

Traders have been cautious as the current quarter shaped up like the previous one, with companies recently lowering expectations, said James Dailey, portfolio manager of Team Asset Strategy Fund in Harrisburg, Pennsylvania. Lower expectations leave room for companies to surprise investors even if their results are not particularly strong.

"The big question and focus is on revenue, and Alcoa had better-than-expected revenue," which calmed the market a little, Dailey said.

Overall, corporate profits were expected to beat the previous quarter's meager 0.1 percent rise. Both earnings and revenues in the fourth quarter are expected to have grown by 1.9 percent, according to Thomson Reuters data.

The Dow Jones industrial average <.dji> gained 61.66 points, or 0.46 percent, to 13,390.51. The Standard & Poor's 500 Index <.spx> rose 3.87 points, or 0.27 percent, to 1,461.02. The Nasdaq Composite Index <.ixic> gained 14.00 points, or 0.45 percent, to 3,105.81.

Facebook Inc shares rose above $30 for the first time since July 2012, trading up 5.3 percent at $30.59. Facebook, which has been tight-lipped about its plans after its botched IPO in May, invited the media to its headquarters next week.

Clearwire Corp shares jumped 7.2 percent to $3.13 after Dish Network bid $2.28 billion for the company, beating out a previous Sprint offer and setting the stage for a takeover battle for the wireless service provider that owns crucial mobile spectrum.

Apollo Group Inc slid after heavier early losses, a day after it reported lower student sign-ups for the third straight quarter and cut its operating profit outlook for 2013. Apollo's shares were last off 7.8 percent at $19.32.

Volume was below the 2012 average of 6.42 billion shares traded per day, as 6.10 billion were traded on the New York Stock Exchange, NYSE MKT and Nasdaq.

Advancing stocks outnumbered declining ones on the NYSE by 2,014 to 963, while on the Nasdaq advancers beat decliners 1,603 to 859.

(Reporting by Gabriel Debenedetti; additional reporting by Angela Moon; Editing by Nick Zieminski)

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Wall Street slips as earnings season gets under way

NEW YORK (Reuters) - Stocks fell on Tuesday, retreating from last week's rally on the "fiscal cliff" deal in Washington, as companies started to report results for the fourth quarter.

After a 4.3 percent jump in the two sessions around the close of the fiscal cliff negotiations, the S&P has declined a bit, with investors finding few catalysts to extend the rally that took the benchmark to five-year highs.

"We had a brief respite, courtesy of what happened on the fiscal cliff deal and the flip of the calendar with new money coming into the market," said Bucky Hellwig, senior vice president at BB&T Wealth Management in Birmingham, Alabama.

Shares of AT&T Inc dropped 1.7 percent to $34.35, making it one of the biggest drags on the S&P 500, after the company said it sold more than 10 million smartphones in the quarter.

This figure beat the same quarter in 2011, but also means increased costs for the wireless service provider. Providers like AT&T pay hefty subsidies to handset makers so that they can offer discounts to customers who commit to two-year contracts.

Fourth-quarter profits are expected to beat the previous quarter's lackluster results, but analyst estimates are down sharply from October. Quarterly earnings are expected to grow by 2.7 percent, according to Thomson Reuters data. Dow component Alcoa, the largest U.S. aluminum producer, reported results after the closing bell.

The Dow Jones industrial average <.dji> dropped 55.44 points, or 0.41 percent, to 13,328.85. The Standard & Poor's 500 Index <.spx> fell 4.74 points, or 0.32 percent, to 1,457.15. The Nasdaq Composite Index <.ixic> lost 7.01 points, or 0.23 percent, to 3,091.81.

"The stark reality of uncertainty with regard to earnings, plus the negotiations on the debt ceiling, are there and that doesn't give investors a lot of reason to take bets on the long side," Hellwig said.

With AT&T's fall, the S&P telecom services index <.gspl> was the worst performer of the 10 major S&P sectors, down 2.7 percent.

Sears Holdings shares dropped 6.4 percent to $40.16 a day after the company said Chairman Edward Lampert would take over as CEO from Louis D'Ambrosio, who is stepping down due to a family member's health issue. The U.S. retailer also reported a 1.8 percent decline in quarter-to-date sales at stores open at least a year.

Markets went lower as some of the first reported earnings were weak.

"It doesn't seem to be bouncing back, it might stay here or sell off a little further," said Stephen Carl, head of U.S. equity trading at The Williams Capital Group in New York.

Shares of restaurant-chain operator Yum Brands Inc fell 4.2 percent to $65.04 a day after the KFC parent warned sales in China, its largest market, shrank more than expected in the fourth quarter.

GameStop was one of the worst performers on the S&P 500 as shares slumped 6.3 percent to $23.19 after the video game retailer reported low customer traffic for the holiday season and cut its guidance.

Shares of Monsanto Co gained 2.5 percent to $98.42 after reaching a more than four-year high at $99.99. The world's largest seed company raised its earnings outlook for fiscal year 2013 and posted strong first-quarter results.

Volume was below the 2012 average of 6.42 billion shares traded per day, as 6.19 billion were traded on the New York Stock Exchange, NYSE MKT and Nasdaq.

Declining stocks outnumbered advancing ones on the NYSE by 1,495 to 1,458, while on the Nasdaq decliners beat advancers 1,305 to 1,158.

(Reporting by Gabriel Debenedetti; Editing by Kenneth Barry and Nick Zieminski)

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Wall Street edges off five-year high, awaits earnings

NEW YORK (Reuters) - Stocks lost ground on Monday, as investors drew back from recent gains that lifted the S&P 500 to a five-year high, in anticipation of sluggish growth in corporate profits.

Shares of financial companies dipped after a group of major U.S. banks agreed to pay a total of $8.5 billion to end a government inquiry into faulty mortgage foreclosures. The KBW bank index <.bkx>, a gauge of U.S. bank stocks, was down 0.3 percent.

Other sectors were hit as well, most notably energy and utilities. The S&P 500 energy sector index <.gspe> fell 0.8 percent and the utilities sector <.gspu> was off 1.1 percent.

The day's decline came a session after the S&P 500 finished at a five-year high, boosted by a budget deal and strong economic data. The S&P 500 rose 4.6 percent last week, the best weekly gain in more than a year.

"It's a little bit of taking some risk off the table ahead of profit season, you're not going to see anything all that great" on earnings, said Larry Peruzzi, senior equity trader at Cabrera Capital Markets Inc in Boston.

Earnings are expected to be only slightly better than the third-quarter's lackluster results, and analysts' current estimates are down sharply from where they were in October. Fourth-quarter earnings growth is expected to come in at 2.8 percent, according to Thomson Reuters data.

Aluminum company Alcoa Inc begins the reporting season by announcing its results after Tuesday's market close. Alcoa shares fell 1.7 percent at $9.10.

The Dow Jones industrial average <.dji> dropped 50.92 points, or 0.38 percent, to 13,384.29. The Standard & Poor's 500 Index <.spx> fell 4.58 points, or 0.31 percent, to 1,461.89. The Nasdaq Composite Index <.ixic> lost 2.84 points, or 0.09 percent, to 3,098.81.

Ten mortgage servicers - including Bank of America , Citigroup , JPMorgan , and Wells Fargo - agreed on Monday to pay $8.5 billion to end a case-by-case review of foreclosures required by U.S. regulators.

In a separate case, Bank of America also announced roughly $11.6 billion of settlements with mortgage finance company Fannie Mae and a $1.8 billion sale of collection rights on home loans.

The bank also entered into agreements with Nationstar Mortgage Holdings and Walter Investment Management to sell about $306 billion of residential mortgage servicing rights.

Bank of America shares lost 0.2 percent at $12.09 while Nationstar Mortgage Holdings jumped 16.8 percent to $38.83.

Citigroup shares were up 0.09 percent to $42.47, and Wells Fargo shares fell 0.5 percent to $34.77.

"The financials probably have the wind behind them now with a lot of the regulations coming out ... the market has to absorb a lot of the gains, and for that reason there's a pullback from this level," said Warren West, principal at Greentree Brokerage Services in Philadelphia.

Shares of U.S. jet maker Boeing Co dropped 2 percent after a Boeing 787 Dreamliner aircraft with no passengers on board caught fire at Boston's Logan International Airport on Monday morning.

Amazon.com shares hit their highest price ever at $269.22 after Morgan Stanley raised is rating on the stock. Shares were up 3.6 percent at $268.46.

Video-streaming service Netflix Inc shares gained 3.4 percent to $99.20 after it said it will carry previous seasons of some popular shows produced by Time Warner's Warner Bros Television.

Walt Disney Co stock fell 2.3 percent to $50.97. The company started an internal cost-cutting review several weeks ago that may include layoffs at its studio and other units, three people with knowledge of the effort told Reuters.

Volume was lower than average, as 4.78 billion shares were traded on the New York Stock Exchange, NYSE MKT and Nasdaq. This is well below the 2012 average of 6.42 billion per session.

Declining stocks outnumbered advancing ones on the NYSE by 1,629 to 1,363, while on the Nasdaq decliners beat advancers 1,438 to 1,066.

(Reporting By Gabriel Debenedetti; Editing by Kenneth Barry and Nick Zieminski)

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"Cliff" concerns give way to earnings focus

NEW YORK (Reuters) - Investors' "fiscal cliff" worries are likely to give way to more fundamental concerns, like earnings, as fourth-quarter reports get under way next week.

Financial results, which begin after the market closes on Tuesday with aluminum company Alcoa , are expected to be only slightly better than the third-quarter's lackluster results. As a warning sign, analyst current estimates are down sharply from what they were in October.

That could set stocks up for more volatility following a week of sharp gains that put the Standard & Poor's 500 index <.spx> on Friday at the highest close since December 31, 2007. The index also registered its biggest weekly percentage gain in more than a year.

Based on a Reuters analysis, Europe ranks among the chief concerns cited by companies that warned on fourth-quarter results. Uncertainty about the region and its weak economic outlook were cited by more than half of the 25 largest S&P 500 companies that issued warnings.

In the most recent earnings conference calls, macroeconomic worries were cited by 10 companies while the U.S. "fiscal cliff" was cited by at least nine as reasons for their earnings warnings.

"The number of things that could go wrong isn't so high, but the magnitude of how wrong they could go is what's worrisome," said Kurt Winters, senior portfolio manager for Whitebox Mutual Funds in Minneapolis.

Negative-to-positive guidance by S&P 500 companies for the fourth quarter was 3.6 to 1, the second worst since the third quarter of 2001, according to Thomson Reuters data.

U.S. lawmakers narrowly averted the "fiscal cliff" by coming to a last-minute agreement on a bill to avoid steep tax hikes this weeks -- driving the rally in stocks -- but the battle over further spending cuts is expected to resume in two months.

Investors also have seen a revival of worries about Europe's sovereign debt problems, with Moody's in November downgrading France's credit rating and debt crises looming for Spain and other countries.

"You have a recession in Europe as a base case. Europe is still the biggest trading partner with a lot of U.S. companies, and it's still a big chunk of global capital spending," said Adam Parker, chief U.S. equity strategist at Morgan Stanley in New York.

Among companies citing worries about Europe was eBay , whose chief financial officer, Bob Swan, spoke of "macro pressures from Europe" in the company's October earnings conference call.

REVENUE WORRIES

One of the biggest worries voiced about earnings has been whether companies will be able to continue to boost profit growth despite relatively weak revenue growth.

S&P 500 revenue fell 0.8 percent in the third quarter for the first decline since the third quarter of 2009, Thomson Reuters data showed. Earnings growth for the quarter was a paltry 0.1 percent after briefly dipping into negative territory.

On top of that, just 40 percent of S&P 500 companies beat revenue expectations in the third quarter, while 64.2 percent beat earnings estimates, the Thomson Reuters data showed.

For the fourth quarter, estimates are slightly better but are well off estimates for the quarter from just a few months earlier. S&P 500 earnings are expected to have risen 2.8 percent while revenue is expected to have gone up 1.9 percent.

Back in October, earnings growth for the fourth quarter was forecast up 9.9 percent.

In spite of the cautious outlooks, some analysts still see a good chance for earnings beats this reporting period.

"The thinking is you need top line growth for earnings to continue to expand, and we've seen the market defy that," said Mike Jackson, founder of Denver-based investment firm T3 Equity Labs.

Based on his analysis, energy, industrials and consumer discretionary are the S&P sectors most likely to beat earnings expectations in the upcoming season, while consumer staples, materials and utilities are the least likely to beat, Jackson said.

Sounding a positive note on Friday, drugmaker Eli Lilly and Co said it expects profit in 2013 to increase by more than Wall Street had been forecasting, primarily due to cost controls and improved productivity.

(Reporting By Caroline Valetkevitch; Editing by Kenneth Barry)

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"Cliff" concerns give way to earnings focus

NEW YORK (Reuters) - Investors' "fiscal cliff" worries are likely to give way to more fundamental concerns, like earnings, as fourth-quarter reports get under way next week.

Financial results, which begin after the market closes on Tuesday with aluminum company Alcoa , are expected to be only slightly better than the third-quarter's lackluster results. As a warning sign, analyst current estimates are down sharply from what they were in October.

That could set stocks up for more volatility following a week of sharp gains that put the Standard & Poor's 500 index <.spx> on Friday at the highest close since December 31, 2007. The index also registered its biggest weekly percentage gain in more than a year.

Based on a Reuters analysis, Europe ranks among the chief concerns cited by companies that warned on fourth-quarter results. Uncertainty about the region and its weak economic outlook were cited by more than half of the 25 largest S&P 500 companies that issued warnings.

In the most recent earnings conference calls, macroeconomic worries were cited by 10 companies while the U.S. "fiscal cliff" was cited by at least nine as reasons for their earnings warnings.

"The number of things that could go wrong isn't so high, but the magnitude of how wrong they could go is what's worrisome," said Kurt Winters, senior portfolio manager for Whitebox Mutual Funds in Minneapolis.

Negative-to-positive guidance by S&P 500 companies for the fourth quarter was 3.6 to 1, the second worst since the third quarter of 2001, according to Thomson Reuters data.

U.S. lawmakers narrowly averted the "fiscal cliff" by coming to a last-minute agreement on a bill to avoid steep tax hikes this weeks -- driving the rally in stocks -- but the battle over further spending cuts is expected to resume in two months.

Investors also have seen a revival of worries about Europe's sovereign debt problems, with Moody's in November downgrading France's credit rating and debt crises looming for Spain and other countries.

"You have a recession in Europe as a base case. Europe is still the biggest trading partner with a lot of U.S. companies, and it's still a big chunk of global capital spending," said Adam Parker, chief U.S. equity strategist at Morgan Stanley in New York.

Among companies citing worries about Europe was eBay , whose chief financial officer, Bob Swan, spoke of "macro pressures from Europe" in the company's October earnings conference call.

REVENUE WORRIES

One of the biggest worries voiced about earnings has been whether companies will be able to continue to boost profit growth despite relatively weak revenue growth.

S&P 500 revenue fell 0.8 percent in the third quarter for the first decline since the third quarter of 2009, Thomson Reuters data showed. Earnings growth for the quarter was a paltry 0.1 percent after briefly dipping into negative territory.

On top of that, just 40 percent of S&P 500 companies beat revenue expectations in the third quarter, while 64.2 percent beat earnings estimates, the Thomson Reuters data showed.

For the fourth quarter, estimates are slightly better but are well off estimates for the quarter from just a few months earlier. S&P 500 earnings are expected to have risen 2.8 percent while revenue is expected to have gone up 1.9 percent.

Back in October, earnings growth for the fourth quarter was forecast up 9.9 percent.

In spite of the cautious outlooks, some analysts still see a good chance for earnings beats this reporting period.

"The thinking is you need top line growth for earnings to continue to expand, and we've seen the market defy that," said Mike Jackson, founder of Denver-based investment firm T3 Equity Labs.

Based on his analysis, energy, industrials and consumer discretionary are the S&P sectors most likely to beat earnings expectations in the upcoming season, while consumer staples, materials and utilities are the least likely to beat, Jackson said.

Sounding a positive note on Friday, drugmaker Eli Lilly and Co said it expects profit in 2013 to increase by more than Wall Street had been forecasting, primarily due to cost controls and improved productivity.

(Reporting By Caroline Valetkevitch; Editing by Kenneth Barry)

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S&P 500 finishes at 5-year high on economic data

NEW YORK (Reuters) - The benchmark Standard & Poor's 500 index ended at a five-year high on Friday, lifted by reports showing employers kept up a steady pace of hiring workers and the vast services sector expanded at a brisk rate.

The gains on the S&P 500 pushed the index to its highest close since December 2007 and its biggest weekly gain since December 2011.

Most of the gains came early in the holiday-shortened week, including the largest one-day rise for the index in more than a year on Wednesday after politicians struck a deal to avert the "fiscal cliff."

The Dow Jones industrial average <.dji> gained 43.85 points, or 0.33 percent, to 13,435.21. The Standard & Poor's 500 Index <.spx> rose 7.10 points, or 0.49 percent, to 1,466.47. The Nasdaq Composite Index <.ixic> edged up 1.09 points, or 0.04 percent, to 3,101.66.

For the week, the S&P gained 4.6 percent, the Dow rose 3.8 percent and the Nasdaq jumped 4.8 percent to post their largest weekly percentage gains in more than a year.

The CBOE Volatility index <.vix>, a measure of investor anxiety, dropped for a fourth straight session, giving the index a weekly decline of nearly 40 percent, its biggest weekly fall ever. The close of 13.83 on the VIX marks its lowest level since August.

In Friday's economic reports, the Labor Department said non-farm payrolls grew by 155,000 jobs last month, slightly below November's level. Gains were distributed broadly throughout the economy, from manufacturing and construction to healthcare.

Also serving to boost equities was data from the Institute for Supply Management showing U.S. service sector activity expanding the most in 10 months.

With the S&P 500 index at a five-year closing high, analysts said any gains above the index's intraday high near 1,475 in September may be harder to come by.

"We are getting to a point where we need a strong catalyst, which could be earnings, it could be three months of good economic data, it could be a variety of things," said Adam Thurgood, managing director at HighTower Advisors in Las Vegas, Nevada.

"What is going on right now is this conflicting view of fundamentals look pretty good and improving, and then you've got these negative tail risks that could blow everything up," Thurgood said.

He referred to "a fiscal superstorm brewing" of issues still left unresolved in Washington, including tough federal budget cuts and the need to raise the government's debt ceiling all within a couple of months.

The rise in payrolls shown by the jobs data did not make a dent in the U.S. unemployment rate still at 7.8 percent.

A Reuters poll on Friday of economists at Wall Street's top financial institutions showed that most expect the Fed in 2013 to end the program with which it bought Treasury debt in an effort to stimulate the economy.

A drop in Apple Inc shares of 2.6 percent to $528.36 kept pressure on the Nasdaq.

Adding to concerns about Apple's ability to produce more innovative products, rival Samsung Electronics Co Ltd is expected to widen its lead over Apple in global smartphone sales this year with growth of 35 percent. Market researcher Strategy Analytics said Samsung had a broad product lineup.

Eli Lilly and Co was among the biggest boost's to the S&P, up 3.7 percent to $51.56 after the pharmaceuticals maker said it expects its 2013 earnings to increase to $3.75 to $3.90 per share, excluding items, from $3.30 to $3.40 per share in 2012.

Fellow drugmaker Johnson & Johnson rose 1.2 percent to $71.55 after Deutsche Bank upgraded the Dow component to a "Buy" from a "Hold" rating. The NYSEArca pharmaceutical index <.drg> climbed 0.6 percent.

Shares of Mosaic Co gained 3.3 percent to $58.62. Excluding items, the fertilizer producer's quarterly earnings beat analysts' expectations, according to Thomson Reuters I/B/E/S.

Volume was modest with about 6.07 billion shares traded on the New York Stock Exchange, NYSE MKT and Nasdaq, slightly below the 2012 daily average of 6.42 billion.

Advancing stocks outnumbered declining ones on the NYSE by 2,287 to 701, while on the Nasdaq, advancers beat decliners 1,599 to 866.

(Reporting by Chuck Mikolajczak; Editing by Nick Zieminski and Kenneth Barry)

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Fed minutes short-circuit Wall Street rally

NEW YORK (Reuters) - U.S. stocks dipped on Thursday after signs the Federal Reserve has growing concern about its highly stimulative monetary policy, giving investors reason to pull back after a two-day rally.

The minutes from the Fed's December policy meeting, released on Thursday, showed increasing reticence about adding to the central bank's $2.9 trillion balance sheet, which it expanded sharply in response to the financial crisis and recession of 2007-2009.

Some policymakers thought asset buying should be slowed or stopped before the end of 2013 while others highlighted the need for further stimulus. The Fed's policy of easy credit has helped push the S&P 500 to a 13.4 percent gain in 2012. Ending that policy would remove an incentive for investors to purchase riskier assets like stocks.

"The surprise was the changes to duration and extent of that program in 2013, but given the tone in previous Fed meeting minutes, it should not have been an entire surprise," said Fred Dickson, chief market strategist at D.A. Davidson & Co. in Lake Oswego, Oregon.

Despite the concerns about the effects of its asset purchases, the Fed look set to continue its open-ended stimulus program for now.

Stocks pushed the S&P 500 index 4.3 percent higher in the previous two sessions. On Thursday investors turned their focus to coming battles in Congress, including the likelihood of bitter fights over budget cuts and raising the federal debt ceiling.

"We were definitely technically extended and ripe for a little bit of a consolidation and today is very orderly - traders and investors are still trying to digest the language and the details from the 2012 taxpayer act," Dickson said.

The Dow Jones industrial average <.dji> dropped 21.19 points, or 0.16 percent, to 13,391.36. The Standard & Poor's 500 Index <.spx> shed 3.05 points, or 0.21 percent, to 1,459.37. The Nasdaq Composite Index <.ixic> lost 11.70 points, or 0.38 percent, to 3,100.57.

Economic data showed U.S. private-sector employers shrugged off a looming budget crisis and stepped up hiring in December, offering further evidence of underlying strength in the economy as 2012 ended.

The government's broader monthly payrolls report, due on Friday, is expected to show the economy created 150,000 jobs compared with 146,000 in November, according to a Reuters poll. The U.S. unemployment rate is seen holding steady at 7.7 percent.

Retailers advanced after several major companies in the sector beat expectations of modest sales increases in December, with the S&P retail index <.spxrt> up 0.4 percent.

Shares in Costco Wholesale Corp rose 1 percent to $102.49 after the company reported a better-than-expected 9 percent rise in December sales at stores open at least a year.

Gap Inc stock climbed 2.3 percent to $32.09 following news that the retailer will buy women's fashion boutique Intermix Inc, the Wall Street Journal reported.

Family Dollar Stores Inc stumbled 13 percent to $55.74 on the company's report of lower-than-expected quarterly profit.

Volume was relatively strong, with about 6.68 billion shares traded on the New York Stock Exchange, NYSE MKT and Nasdaq, slightly above the 2012 daily average of 6.42 billion.

Advancing stocks outnumbered declining ones on the NYSE by 1,692 to 1,321, while on the Nasdaq, decliners beat advancers 1,287 to 1,187.

(Reporting by Chuck Mikolajczak; Editing by Kenneth Barry)

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