Last updated: November 15, 2011 10:15 pm

Hopes for a new Italian government drive Wall Street

A flurry of positive economic data edged US stocks into positive territory on Tuesday, before traders seized on good news from Europe to give the rally momentum during the afternoon.

Jacobs Engineering and Varian Medical Systems were the star performers in the S&P 500.

Jacobs jumped 7.9 per cent to $41.17 after the construction group said it had ended the third quarter with a backlog of orders totalling $14.3bn. Varian was up 6.2 per cent to $60.60 after JPMorgan analysts told clients the German conglomerate Siemens would exit radiation therapy treatments, allowing Varian to gain market share.

The S&P 500 finished the day at 1,257.81, on solid gains of 0.5 per cent. Trading had been volatile until midday when news that Italian prime minister-designate Mario Monti may form a government as soon as Wednesday triggered a decisive rally.

“US markets have been given a reprieve for now,” said Quincy Krosby, a market strategist at Prudential Financial. “But that could be reversed in a second if there is bad news from Europe.”

The Dow Jones Industrial Average was up 0.5 per cent to 1,257.81.

The Nasdaq Composite index gained 2.1 per cent to 2,686.2, with support from Apple , by far its most heavily weighted stock.

Apple shares rose 2.5 per cent to $388.83 after ISI Group analyst Brian Marshall told clients he expected the company to initiate a dividend policy next year. Apple has not paid a dividend since 1995, according to Bloomberg data.

Retail sales figures rose 0.5 per cent month on month in October, but that was not enough to stop
a host of bellwether retail names falling on results releases.

Walmart was off 2.4 per cent to $57.46 despite reporting US sales growth for the first time in nine quarters.

Sales were driven by discounting that hurt margins, driving profit 3 per cent lower than in the same quarter of 2010 to $3.3bn.

“Walmart investors have become accustomed to earnings beats,” said David Shick, head of consumer research at Stifel Nicolaus. “But the company is correct to focus on expanding market share at the expense of the bottom line in the short term.”

Walmart’s size and exposure to thrifty consumers have made it a favourite of defensive investors this year and it remains one of the best performers in the S&P 500.

Urban Outfitters fell sharply in early trading, before riding the afternoon rally, to end the day up 0.1 per cent to $26.85. Many analysts were alarmed by the level of unsold inventory held at the quarter’s end, a concern that Jeff Black at Citigroup played down.

“The stance to the end of the fourth quarter with inventory better aligned with sales reinforces our view that Urban’s margin trough is confined to the second half of 2011,” Mr Black wrote to clients.

Office equipment store Staples fell 3.6 per cent to $14.81 on anaemic sales growth of just 0.5 per cent compared with the same quarter last year. Barclays Capital analysts noted, however, that in local currency terms revenue was up 7 per cent year on year.

Home Depot was down 0.5 per cent to $38.07 despite beating analyst expectations with earnings per share of 60 cents. Sears Holdings dropped 3.1 per cent to $70.03 after its Canadian namesake – in which it holds a 90 per cent stake – posted a loss of C$45.8m.

The focus on retailers took the heat off bank stocks with the financial sector of the S&P 500 gaining 0.4 per cent, despite another sharp rise in the yields of Italian and Spanish sovereign bonds.

Citigroup fell 1.3 per cent to $28.02 on reports that a host of hedge fund investors, including John Paulson, had cut their stakes in the bank during the third quarter.

High-profile investor flight also hurt professional networking website LinkedIn , which slipped 4.8 per cent to $74.86, on news Bain Capital will sell its entire stake of 3.71m shares, when the newly floated company’s lock-out period ends.

PepsiCo was boosted by news that activist investor Nelson Peltz has taken a $146m stake. The stock was up 2.7 per cent to $64.50 on hopes that Mr Peltz will push the board to boost shareholder returns.

Quanta Services climbed 2.2 per cent to $19.19, on renewed hope that the Keystone XL pipeline, for which Quanta has a lucrative service contract, will be given the go-ahead if the state of Nebraska’s environmental concerns can be addressed.

The hard drive manufacturer Western Digital Corporation slipped 4.9 per cent to $25.05 as the open-ended impact of widespread flooding in Thailand on its factories led another analyst to downgrade the stock.

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