Stocks climbed to a five-month high on Tuesday, led by materials stocks after an upbeat forecast by aluminum company Alcoa and strong gains in bank shares.
A gauge of materials companies' shares <.GSPM> was among the leaders of S&P 500 sectors, with a gain of 1.8 percent.
The U.S. equity market continued its recent divergence from the woes of the euro zone. Recent economic reports and optimism about the U.S. earnings season have pushed stocks higher in the start of the new year, with the benchmark S&P 500 rising in five of six sessions.
Investors are still focusing on Europe but not putting as much weight on Europe as they were in November, said Jonathan Corpina, head of NYSE floor operations for Meridian Equity Partners in New York.
That focus could change quickly. Key bond auctions later this week from Italy and Spain, two countries at the center of the euro zone crisis, could hurt sentiment if they go poorly.
Historically, earnings season has helped the market shift higher - so let's hang our hats on this for now, but let's not forget about what is going on in Europe, Corpina said.
Industrial and materials stocks, closely tied to economic performance, were the day's biggest gainers. Caterpillar Inc
U.S. bank stocks continued a rebound that has lifted the KBW banks index <.BKX> nearly 9 percent so far this year. The KBW rose 1.9 percent on Tuesday.
Easing some concerns about Europe, Fitch said it does not expect to cut France's AAA credit rating this year, but countries under review such as Italy or Spain could be downgraded by one or two notches.
The Dow Jones industrial average <.DJI> gained 69.78 points, or 0.56 percent, to 12,462.47. The Standard & Poor's 500 Index <.SPX> rose 11.38 points, or 0.89 percent, to 1,292.08. The Nasdaq Composite Index <.IXIC> climbed 25.94 points, or 0.97 percent, to 2,702.50.
The Dow and S&P 500 hit their highest intraday levels in five months. The S&P 500 close above 1,285.09 is the highest since the end of July and marked a breach of technical resistance, which could spur further gains.
Copper prices rose 3.1 percent, the best performance since late November, after China reported copper imports rose to a record high last month.
The CBOE Volatility Index VIX <.VIX>, Wall Street's so-called fear gauge, fell 2.9 percent to 20.46, making another test of the psychologically key 20 level, according to WhatsTrading.com options strategist Frederic Ruffy.
The VIX is down 11.6 percent so far in 2012 and falling to levels last seen in late July as the S&P 500 has seen average daily price moves of fewer than 8 points so far this year, he said.
Volume was solid, with about 7.02 billion shares traded on the New York Stock Exchange, NYSE Amex and Nasdaq, above the daily average of 6.7 billion.
Advancing stocks outnumbered declining ones on the NYSE by 2,305 to 687, while on the Nasdaq, advancers beat decliners 1,833 to 699.
(Reporting By Chuck Mikolajczak; Additional reporting by Doris Frankel; Editing by Kenneth Barry)