Updated from 4:14 p.m. EDT

Stocks had a sluggish start but closed higher Thursday as investors bet that recent job growth has been slow enough to convince the

Federal Reserve

to suspend its rate-hiking campaign.

The

Dow Jones Industrial Average

, having been down as many as 55 points earlier, finished up 42.66 points, or 0.38%, to 11,242.59, aided by a 2.8% rise in component

Caterpillar

(CAT) - Get Report

. The

S&P 500

was up 1.72 points, or 0.13%, at 1280.27, and the

Nasdaq Composite

was higher by 13.53 points, or 0.65%, to 2092.34. Like the Dow, both reversed earlier losses.

"Indications are that the market is starting to discount the end

of rate increases," said Barry Hyman, equity market strategist with EKN Financial. "While we've rallied in the past on the belief of hikes being over, today we see sectors giving credence to that belief."

For example, the Philadelphia Housing Sector Index added 3.2%, the Nasdaq Transportation Index ended higher by 3%, and the Dow Jones Transportation Average gained 2.6%.

About 1.81 billion shares changed hands on the

New York Stock Exchange

, with advancers beating decliners by a 5-to-3 margin. Volume on the Nasdaq was 1.84 billion shares, and winners edged losers 3 to 2.

Even before trading began, investors had to contend with the monthly crush of chain-store sales and a number of corporate earnings reports. On the Nasdaq, a gain of 1.5% on the Philadelphia Semiconductor Sector Index helped overcome an 8% decline in

Starbucks

(SBUX) - Get Report

, which fell after posting disappointing same-store sales growth late Wednesday.

A day ahead of the government's July employment report, the Labor Department said initial jobless claims rose by 14,000 to 315,000 last week. Elsewhere, the Commerce Department said U.S. factory orders rose 1.2% in June, falling short of economists' expectations. Excluding transportation orders, which jumped 7.4%, factory orders were up just 0.1%.

In addition, the Institute for Supply Management said its services index dropped to a reading of 54.8 in July from 57.0 the previous month. Economists had expected the index to dip slightly to 56.9.

Though the economic data are always closely monitored by Wall Street, this week's numbers have a bit more significance because they come in front of a Fed policymaking meeting on Aug. 8. Even with the meeting only five days away, analysts haven't formed a consensus opinion as to whether the central bank will again raise its fed funds target rate or leave it unchanged at 5.25%.

"A weaker number would be good for the market, because that would signal the possibility of a Fed pause next week," said Paul Mendelsohn, chief investment officer with Windham Financial. Economists currently expect that nearly 150,000 jobs were added to U.S. payrolls last month and that the unemployment rate held steady at 4.6%.

Following the release of the day's economic numbers, the 10-year Treasury was up 3/32 in price to yield 4.95%, and the dollar fell against the euro and yen.

Oil retreated as Tropical Storm Chris weakened in the Caribbean. Meteorologists had expected the storm to become a hurricane, but now the National Hurricane Center has lifted hurricane warnings for the Bahamas. In Nymex floor trading, September crude fell 35 cents to finish at $75.46 a barrel.

The first Thursday of the month brought retail sales.

Wal-Mart

(WMT) - Get Report

said same-store sales rose 2.4% in July, and total revenue jumped 12.5% to $25.66 billion. The world's largest retailer said it expects same-stores sales growth between 1% and 3% for August. Shares of Wal-Mart ended the session up 36 cents, or 0.8%, to $44.73.

Among other chains, warehouse retailer

Costco Wholesale

(COST) - Get Report

said July same-store climbed 7%. Total sales climbed 11% to $4.48 billion.

Others with rising sales included

Federated

(FD)

,

Jos. A. Bank Clothiers

(JOSB)

and

Limited Brands

(LTD)

.

To view Gregg Greenberg's video take on today's market, click here

.

Pier 1 Imports

(PIR) - Get Report

said same-store sales for July dropped 14.9%. Total sales slid nearly 13% to $113.1 million. Pier 1 was lower by 4 cents, or 0.6%, to finish at $6.48.

Gap

(GPS) - Get Report

issued a profit warning, saying its earnings for the second quarter would be below analysts' estimates. Same-store sales fell last month, but total revenue did tick up 1% to $1.05 billion. Shares of Gap were off 51 cents, or 3%, to $16.61.

Pacific Sunwear

(PSUN)

, an apparel seller, also cut its forecast for the second quarter after posting weaker-than-expected sales in July. The company now believes it will earn 14 cents to 15 cents a share for the quarter, well short of the 20-cent consensus estimate. Last month's same-store sales declined 10.6% and total sales fell 5% to $102.4 million. Pacific Sunwear lost 81 cents, or 4.9%, to $15.62.

On the earnings front, Canadian telecom gearmaker

Nortel

(NT)

earned $366 million, or 8 cents a share, in the latest quarter. A year ago, Nortel lost $33 million, or 1 cent a share. Revenue rose to $2.74 billion from $2.38 billion a year ago. Analysts were looking for a profit of 1 cent a share and revenue of $2.8 billion. Nortel was down 6 cents, or 2.9%, to close at $1.98.

Tyco's

(TYC)

third-quarter earnings fell to $868 million, or 42 cents a share, from $1.19 billion, or 56 cents a share, a year ago. Revenue rose to $10.5 billion from $10 billion. The stock fell 41 cents, or 1.6%, to $25.95.

For the second quarter,

CBS

(CBS) - Get Report

made $490 million, or 64 cents a share, from continuing operations. Last year's continuing operations profit was $380 million, or 47 cents a share. Before items, CBS earned 50 cents a share, in line with the Thomson Financial estimate. Revenue fell 1% from a year ago to $3.48 billion. CBS gave back 79 cents, or 2.9%, to $26.36.

Cardinal Health

(CAH) - Get Report

had fiscal fourth-quarter earnings of $321 million, or 76 cents a share, up 25% from a year ago as revenue jumped 12% to $21.7 billion. Operating earnings increased 12% to 80 cents a share but missed the Thomson First Call average estimate. Cardinal tacked on 2 cents, or 0.1%, to $66.55.

Sprint Nextel

(S) - Get Report

said it had second-quarter earnings of $370 million, or 12 cents a share, down from $600 million, or 40 cents a share, a year ago. Revenue nearly doubled to $10.01 billion following the merger between Sprint and Nextel.

Excluding charges related to the merger, the telecom company earned 32 cents a share. Analysts expected EPS of 33 cents on revenue of $10.39 billion, according to Thomson First Call. Sprint shares dropped 11.8%, down $2.38 to $17.75.

Late Wednesday, automaker

Ford

(F) - Get Report

revised its second-quarter loss to $254 million, or 14 cents a share, ballooning from $123 million, or 7 cents a share, as it originally posted July 20. In a

Securities and Exchange Commission

filing, Ford blamed the revision on a wider estimated pension curtailment loss. Ford lost 10 cents, or 1.4%, to close at $6.86.

Away from earnings,

IBM

(IBM) - Get Report

said it will purchase

MRO Software

(MROI)

in a deal worth $740 million, or $25.80 a share. MRO surged by $3.86, or 17.9% to $25.46.

Overseas, markets were mixed to lower. In Asia, Japan's Nikkei was up fractionally to 15,470 and Hong Kong's Heng Seng ticked higher by 0.1% to 17,048. European shares fell, with Germany's Xetra DAX giving up 0.4% to 5656, and London's FTSE dropping 1.4% to 5848 after the Bank of England and European Central Bank both raised their key interest rates by 25 basis points.

On Friday, earnings reports are expected from

Occidental Petroleum

(OXY) - Get Report

,

Maxim Integrated Products

(MXIM) - Get Report

and

Goodyear Tire & Rubber

(GT) - Get Report

, among others.