* Hillshire Brands shares soar after Pilgrim's Pride bid
* Pfizer's stock edges up after it ends AstraZeneca bid
* Small caps gain for fourth straight day
* Dow up 0.4 pct; S&P 500 up 0.6 pct; Nasdaq up 1.2 pct (Updates to close)
By Chuck Mikolajczak
NEW YORK, May 27 U.S. stocks rose on Tuesday as the S&P 500 scored a second straight record close, buoyed by the latest round of merger activity and as expectations for rate cuts by the European Central Bank stoked investors' appetite for equities.
ECB chief Mario Draghi said on Monday the bank must be "particularly watchful" for any negative price spiral in the euro zone. His comments increased bets that the bank was ready to cut rates next week to counter low inflation and weak lending in the euro zone, keeping asset purchases as an option.
U.S. markets, which were closed Monday for Memorial Day, had to digest the ECB news.
"(It's) a rate cut or some sort of nonconventional stimulus," said Peter Cardillo, chief market economist at Rockwell Global Capital in New York. "No question about it, we had to catch up from yesterday."
The data also supported equities. Orders for durable goods, which are U.S. manufactured goods meant to last three years or more, unexpectedly rose in April, and consumer confidence perked up in May, backing views of a rebound in economic growth.
"Durable goods was what came out early and that set a very positive tone for the market, especially since the prior numbers were revised sharply higher," said Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York.
"This is a lot of what the market has been talking about, which is the industrial side beginning to spend on infrastructure, whether it is public or private, and just the industrial side kicking in."
The Russell 2000 and Nasdaq Composite outperformed other major indexes on Tuesday, as they did handily last week, indicating a rotation out of small caps and growth shares could be over. The Russell rose 1.4 percent, its fourth straight advance and sixth gain in the past seven sessions.
The Dow Jones industrial average gained 69.23 points or 0.42 percent, to end at 16,675.50. The S&P 500 advanced 11.38 points or 0.60 percent, to 1,911.91, a record. The Nasdaq Composite added 51.26 points or 1.22 percent, to 4,237.07.
Shares of Hillshire Brands, known for sausages and lunch meats, surged 22.1 percent to $45.19 after poultry producer Pilgrim's Pride offered to buy Hillshire in a $6.4 billion deal. Shares of Pinnacle Foods , which Hillshire plans to buy, slid 5.4 percent to $31.48. Pilgrim's Pride gained 1.7 percent to $25.52.
Pfizer shares added 0.4 percent to $29.61 a day after the U.S. drugmaker walked away from its bid to buy AstraZeneca for nearly 70 billion pounds ($118 billion). U.S.-traded AstraZeneca shares dipped 0.3 percent to $72.05.
Volume was light, with about 5.38 billion shares traded on U.S. exchanges, short of the 5.8 billion average so far this month, according to data from BATS Global Markets.
Advancing stocks outnumbered declining ones on the New York Stock Exchange by a ratio of 2 to 1, while on the Nasdaq, nearly three stocks rose for every one that fell. (Reporting by Chuck Mikolajczak; Editing by Jan Paschal)
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