NEW YORK (Reuters) - Stocks rose on Tuesday on hopes that the Federal Reserve will agree to extend stimulus measures as the economy struggles to recover and the euro zone's debt crisis gets worse.
The S&P 500 has gained 7.2 percent from a five-month intraday low reached on June 4. On Tuesday, the benchmark index closed above its 50-day moving average of 1,346.90 for the first time in seven weeks. But the sharp gains leave the market vulnerable if the outcome of Wednesday's Fed meeting doesn't meet market expectations.
"People are anticipating some type of response from the Fed tomorrow, and are buying or covering shorts in anticipation of that," said Paul Zemsky, head of asset allocation at ING Investment Management in New York. "There's a risk the market gets disappointed."
Growth-related stocks led the rally, with the S&P materials sector index up 2 percent and the financial sector index up 1.7 percent. U.S. Steel Corp jumped 9.5 percent to $20.15. Bank of America added 4.5 percent to $8.11.
Markets kept a wary eye on developments in Europe. A sharp decline in German business sentiment, alongside stubbornly high Spanish bond yields, raised expectations for stimulus from European policymakers as well.
British media reports earlier said German Chancellor Angela Merkel was poised to use Europe's dual bailout funds, the European Financial Stability Facility and the European Stability Mechanism, to buy debt of countries like Italy and Spain.
"We went to the highs of the day on that, and we have the Fed tomorrow. This is a bailout, central bank largesse bounce, and we'll see what follow-through (occurs) after the Fed tomorrow and whatever becomes of the ESM," said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
A German government official told Reuters there was no discussion at the G20 summit in Mexico about using Europe's rescue funds to buy the bonds of stricken members of the euro zone.
The Dow Jones industrial average gained 95.51 points, or 0.75 percent, to 12,837.33 at the close. The Standard & Poor's 500 Index advanced 13.20 points, or 0.98 percent, to 1,357.98. The Nasdaq Composite Index rose 34.43 points, or 1.19 percent, to close at 2,929.76.
On Tuesday, the Federal Open Market Committee began the first day of a two-day meeting on interest-rate policy. The meeting got under way with expectations increasing that the U.S. central bank may extend its "Operation Twist" program, its effort to drive down long-term borrowing costs.
Spain's government bond yields eased slightly after it raised 3 billion euros at a short-term debt sale, with the higher yields enticing investors. However, with its 10-year bond yield above 7 percent, investors worry how long the euro zone's fourth-largest economy can survive without foreign help.
Oracle Corp rose 3.1 percent to $27.96 a day after it reported stronger-than-expected quarterly profit, releasing the results three days ahead of schedule after news of the pending departure of a senior sales executive fueled concerns that business was stagnating.
Walgreen Co tumbled 5.9 percent to $30.09 after the pharmacy chain reported quarterly earnings and said it would buy a 45 percent stake in Alliance Boots for $6.7 billion in a cash-and-stock deal.
FedEx Corp rose 2.8 percent to $91.01 after the package delivery company reported fourth-quarter earnings and provided an outlook for the first quarter and 2013.
Shares of J.C. Penney dropped 8.5 percent to $22.25 a day after its president abruptly left the department store operator following a botched advertising campaign.
Volume was light, with about 6.7 billion shares traded on the New York Stock Exchange, the American Stock Exchange and the Nasdaq, below last year's daily average of 7.84 billion.
Advancers outnumbered decliners by a ratio of 5 to 1 on the New York Stock Exchange, while on the Nasdaq, slightly more than three stocks rose for every one that fell.