Wall Street rallies on "fiscal cliff" optimism

NEW YORK (Reuters) - U.S. stocks climbed on Tuesday, putting the S&P 500 on track for its best two-day run in a month, as investors gained confidence that "fiscal cliff" talks were progressing, even as significant differences separate Democrats and Republicans in Washington.

The gains followed a rally on Monday that lifted the S&P 500 to its highest point in nearly two months. Investors remain confident that Washington will come to an agreement to avoid a series of spending cuts and tax hikes before the end of the year that could hurt economic growth.

President Barack Obama's most recent offer makes concessions to the Republicans in taxes and entitlement spending, but House Speaker John Boehner said the offer is "not there yet," though he remains hopeful about an agreement. Senate Democrats, however, have expressed concern about entitlement cuts, particularly to Social Security.

"As you get more and more clarity and dialogue that there will be a compromise to avoid a fiscal cliff, I think the markets are going to rally," said Weston Boone, vice president of listed trading at Stifel Nicolaus Capital Markets, in Baltimore.

"What's holding this market back - the S&P 500 - from continuing to reach higher highs is the macro headwinds, and a lot of that emanates from (Washington) D.C."

For a second day, banks led the rally. Goldman Sachs Group shares shot up 3.1 percent to $127.30 and Morgan Stanley gained 3.2 percent to $19.13 after Jefferies Group reported a higher-than-expected adjusted quarterly profit.

Jefferies rose 2.9 percent to $18.77. The S&P 500 Financial Index <.gspf> climbed 1.2 percent.

"I think it's an expectation that if the fiscal cliff is resolved, it's going to be a better environment in 2013 for the financial names," said Michael James, senior trader at Wedbush Morgan in Los Angeles.

Shares of firearm makers sank on Tuesday as investors sold after the school shooting in Newtown, CT on Friday that killed 20 children and six adults.

Smith and Wesson fell 9.8 percent to $7.81, as the stock stayed on track for its busiest day in history. Sturm Ruger and Co slid 8.3 percent to $40.35.

The Dow Jones industrial average <.dji> jumped 104.46 points, or 0.79 percent, to 13,339.85. The Standard & Poor's 500 Index <.spx> rose 13.77 points, or 0.96 percent, to 1,444.13. The Nasdaq Composite Index <.ixic> gained 39.29 points, or 1.31 percent, to 3,049.89.

Tech shares rose, and gains in large-cap technology shares lifted the Nasdaq. Seagate Tech rose 4.9 percent to $29.41 while F5 Networks Inc gained 4.7 percent to $96.93. The S&P Information Technology Index <.gspt> rose 1.5 percent.

The S&P Energy Index <.gspe> also climbed 1.5 percent.

Baker Hughes Inc said third-quarter margins and revenue would be below its expectations because of lower land drilling activity and price erosion. Shares rose 4.3 percent to $42.3417, reversing a decline in the premarket session.

Arbitron Inc surged 23.6 percent to $47 after Nielsen Holdings NV agreed to buy the media and marketing research firm in a deal worth $1.26 billion. Nielsen rose 3.5 percent to $30.66.

(Editing by Jan Paschal)

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