Rate-Cut Hopes Lift Stocks

Believing that the evidence is stacking up in their favor, those wanting to see rate reductions weren't terribly bothered by a stronger-than-expected report on the service sector. The Institute for Supply Management said its November nonmanufacturing index was 58.9, topping estimates of 55.

"The lower-than-expected labor costs are pleasing the market, taking away from the inflation story," said Barry Hyman, equity market strategist with EKN Financial. "While the Fed isn't ready for a rate cut, it's one piece of data that may ease their fears."

Private equity firms have been on a buyout tear this year, and another deal has now been struck, this one in the insurance sector, where Direct General (DRCT Quote) will be acquired by Texas Pacific and Fremont Partners. Shares of Direct General surged $3.99, or 24.2%, to close at $20.50.

Homebuilder Toll Brothers (TOL Quote) posted fourth-quarter earnings and revenue that declined from a year ago, but the company indicated it believes the worst of the housing sector's softness is over. Toll Brothers gained 96 cents, or 3%, to $32.87.

AutoZone (AZO Quote) reported fiscal first-quarter earnings of $123.9 million, or $1.73 a share, rising from $114.4 million, or $1.48 a share, in the year-ago quarter. Revenue rose 4.1% to $1.39 billion. Shares of AutoZone ended higher by $4.82, or 4.2%, to $119.29.

Turning to the research front, UBS upgraded coffee seller Starbucks (SBUX Quote), and AG Edwards cut its rating on financial services giant American Express (AXP Quote). Starbucks rose 3.1% to $36.84. American Express overcame early weakness and tacked on 0.1% to $59.92.