U.S. stocks rose as banks rallied and employment data bolstered optimism in the economy, helping to erase earlier losses triggered by reduced profit forecasts at companies including Target Corp. and J.C. Penney Co.

Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and SunTrust Banks Inc. rose at least 2.5 percent after Deutsche Bank AG saw “encouraging signs” for banks’ fourth-quarter earnings. LSI Corp. rallied 6.8 percent after the chipmaker was raised to “outperform” from “neutral” at Wedbush Securities. Target and J.C. Penney each lost more than 3 percent.

The S&P 500 climbed 0.2 percent to 1,279.95 as of 2:34 p.m. New York time after tumbling as much as 0.9 percent earlier. The Dow Jones Industrial Average fell 10.14 points, or 0.1 percent, to 12,408.28 today.

“We’re starting to see better data in the U.S. as opposed to the obsession with Europe that we’ve seen all of last year,” Donald Selkin, the chief market strategist at National Securities Corp. in New York, said in a telephone interview. “People are seeing that our economy will definitely not fall into the recession. Now you can see that there’s a separation between what’s happening here, which is better, and Europe, which is still projected to go into recession.”

The S&P 500 closed at a two-month high yesterday and the Dow Jones Industrial Average (INDU) reached its highest level (INDU) since July after gaining during the first two trading sessions of the year on signs of manufacturing growth and improving sales at carmakers and retailers.

Banks Recover

The KBW Bank Index added 2.5 percent as all 24 stocks gained. Bank of America soared 7.8 percent, the most in the Dow, to $6.26, after dropping as much as 1.7 percent earlier. JPMorgan increased 2.5 percent to $35.82. Citigroup Inc. (C) added 2 percent to $28.72, while SunTrust rallied 4.7 percent to $19.53.

Fourth-quarter earnings reports from the largest U.S. banks should include some “encouraging signs” including accelerating loan growth, higher mortgage revenues and improving credit, Deutsche Bank analyst Matt O’Connor said in a note to clients.

Target (TGT) and J.C. Penney cut their earnings forecasts as retailers (S5RETL) reported mixed December same-store sales results. Gap Inc., Target and Kohl’s Corp. reported sales that trailed analysts’ estimates after mistiming promotions or running out of inventory during a projected record holiday shopping season.

J.C. Penney, Target

J.C. Penney dropped 3.2 percent to $33.81. The retailer forecast fourth-quarter earnings of 65 cents to 70 cents a share, less than the average analyst estimate of $1.08 a share. Target lost 3 percent to $48.49. The second-largest U.S. discount retailer cut its fourth-quarter profit forecast to no more than $1.43 a share, below the average analyst estimate of $1.48, according to a Bloomberg survey.

Gap fell 3.3 percent to $18.27, while Kohl’s slipped 1 percent to $46.88.

Macy’s Inc. added 3.7 percent to $33.87. The Cincinnati- based retailer reported a 6.2 percent increase in same-store sales, topping the 4.6 percent estimate.

Alcoa Inc. is scheduled to mark the unofficial start of the fourth-quarter earnings season on Jan. 9. Profit at S&P 500 companies rose 6.2 percent during the September-December period, according to analyst estimates compiled by Bloomberg, which would mark the slowest growth since the third quarter of 2009.

Jobs Reports

Stock futures pared early losses after ADP Employer Services said payrolls increased by 325,000 last month, topping the median economist forecast for growth of 178,000 jobs. Applications for jobless benefits (INJCJC) decreased 15,000 in the week ended Dec. 31 to 372,000, Labor Department figures showed today. The median estimate of 38 economists in a Bloomberg News survey forecast 375,000 claims. The data comes before tomorrow’s payrolls report from the Labor Department.

“On the surface these are positive numbers ahead of tomorrow’s jobs report,” James Gaul, a money manager at Boston Advisors LLC in Boston, said in a telephone interview. His firm oversees about $2 billion. “The market is trying very hard to be constructive here,” he said. “Everything is still seen in the context of whether the austerity measures taken in Europe force a global recession that will impact U.S. businesses.”

Global stocks fell earlier as France sold 7.96 billion euros ($10.2 billion) of debt, with borrowing costs rising in its first auction of the year. UniCredit SpA retreated for a second day after Italy’s biggest bank yesterday announced plans to hold a rights offer to boost capital. The lender is selling shares at a 43 percent discount because of a deepening in the debt crisis, Chief Executive Officer Federico Ghizzoni told Il Sole 24 Ore.

Monsanto Rallies

Monsanto Co. (MON) rose 4.9 percent to $76.25. The world’s largest seed company posted first-quarter earnings that exceeded estimates as Latin American farmers grew more genetically modified corn and said U.S. orders are ahead of last year.

LSI gained the most in the S&P 500, rallying 6.8 percent to $6.64. The maker of chips used in computer disk drives was raised to “outperform” from “neutral” at Wedbush Securities, which cited better-than-estimated hard drive disk shipments last quarter.

MetroPCS Communications Inc. (PCS) sank 8.9 percent to $8.01 for the biggest drop in the S&P 500. The Texas-based pay-as-you-go wireless carrier said it added 197,000 net new users in the fourth quarter. Analysts predicted 223,000, the average of five estimates compiled by Bloomberg.

Eli Lilly Falls

Eli Lilly & Co. (LLY) slumped 1.1 percent to $40.26. The maker of the antipsychotic Zyprexa provided a 2012 earnings forecast that missed analyst estimates. Tesoro Corp. (TSO) fell 6.9 percent to $22.36. The largest independent refiner on the U.S. West Coast said it lost 55 cents to 80 cents a share in the fourth quarter, missing analysts’ forecasts for a profit.

Barnes & Noble Inc. (BKS) tumbled 18 percent to $11.07. The largest U.S. bookstore said it will lose as much as $1.40 a share in fiscal 2012, after previously projecting a loss (BKS) of a maximum of 50 cents a share. Sales of its Nook Simple Touch trailed its estimates during the holiday shopping season.

U.S. stocks will return at least 10 percent in 2012, beating foreign markets for a third year, while Treasury yields climb, according to BlackRock Inc.’s Bob Doll. The S&P 500 may exceed 1,350 this year, he said at a BlackRock presentation in New York today. The stock index (BKX) ended 2011 at 1,257.60.

Health-care and energy stocks will perform better than utilities and financials, he said. Doll expects dividends and stock buybacks to rise by 20 percent or more this year.

“If companies continue to deliver -- and there are a lot of reasons why they are -- stocks should continue to do well,” Doll said.

U.S. stocks fell, following a two-day advance for the Standard & Poor’s 500 Index, as disappointing profit forecasts and concerns over Europe’s debt crisis offset improving jobs data.

J.C. Penney Co. and Target Corp. lost at least 3.9 percent after cutting their fourth-quarter earnings forecasts. Eli Lilly & Co. (LLY) and Tesoro Corp. (TSO) dropped more than 2.8 percent as they providing earnings forecasts that also missed analyst estimates. Monsanto Co. (MON) jumped 3.9 percent after posting better-than- anticipated first-quarter earnings.

The S&P 500 fell 0.5 percent to 1,271.29 as of 9:31 a.m. New York time.

“The disappointing earnings forecast can weigh down on stocks,” Stanley Nabi, New York-based vice chairman of Silvercrest Asset Management Group, which oversees $10.5 billion, said in a telephone interview. “The economic reports indicate that corporate managers may be starting to hire with the improved business conditions.”

The profit forecasts damped optimism about corporate earnings growth heading into the fourth-quarter reporting season, and overshadowed a larger-than-forecast gain in a gauge of private employment and a drop in jobless claims.

Stock futures pared losses earlier after ADP Employer Services said payrolls increased by 325,000 last month, topping the median economist forecast for growth of 178,000 jobs. Applications for jobless benefits decreased 15,000 in the week ended Dec. 31 to 372,000, Labor Department figures showed today. The median estimate of 38 economists in a Bloomberg News survey forecast 375,000 claims.

Payrolls Report

The data comes before tomorrow’s payrolls report from the Labor Department, which is forecast to show the U.S. economy generated 150,000 jobs last month, according to an economist survey.

“On the surface these are positive numbers ahead of tomorrow’s jobs report,” James Gaul, a money manager at Boston Advisors LLC in Boston, said in a telephone interview. His firm oversees about $2 billion. “The market is trying very hard to be constructive here,” he said. “Everything is still seen in the context of whether the austerity measures taken in Europe force a global recession that will impact U.S. businesses.”

Global stocks fell as France sold 7.96 billion euros ($10.2 billion) of debt today, with borrowing costs rising in its first auction of the year. UniCredit SpA retreated for a second day after Italy’s biggest bank yesterday announced plans to hold a rights offer to boost capital. The lender is selling shares at a 43 percent discount because of a deepening in the debt crisis, Chief Executive Officer Federico Ghizzoni told Il Sole 24 Ore.

U.S. stocks fell, after yesterday’s rally, as factory orders trailed economists’ estimates and concern grew that European banks may need to raise more capital amid the region’s sovereign debt crisis.

Bank of America Corp. (BAC) slumped 3.1 percent as financial shares dropped the most among 10 groups in the Standard & Poor’s 500 Index. Yahoo! Inc. lost 2 percent after appointing Scott Thompson of PayPal as chief executive officer. EBay Inc., which owns PayPal, tumbled 3.9 percent. TiVo Inc. (TIVO) rose 8.9 percent after settling a patent lawsuit over digital video recorders with AT&T Inc.

The S&P 500 slid 0.5 percent to 1,270.39 at 10:14 a.m. New York time. The Dow Jones Industrial Average declined 37.12 points, or 0.3 percent, to 12,360.26 today.

“For most of the manufacturing and industrial data we can expect to see some surprises like this going forward," Eric Teal, chief investment officer at First Citizens Bancshares Inc., which manages $4 billion in Raleigh, North Carolina, said in a phone interview. "The market weakness today is a little bit of a reaction to strong gains from yesterday. Our belief is that the U.S. economy continues along a steady recovery path."

The S&P 500 lost 0.04 point to 1,257.60 in 2011, the smallest annual change since 1947. The benchmark gauge for U.S. equities surged 14 percent from last year’s lowest level on Oct. 3 through Dec. 30 as better-than-estimated economic data fueled optimism the world’s largest economy can shrug off concern over Europe’s sovereign-debt crisis. Stocks rallied 1.6 percent yesterday, sending the Dow to the highest level since July, amid signs that manufacturing output is increasing from China to Australia and America.

U.S. equities extended losses as bookings for factory goods rose 1.8 percent after a revised 0.2 percent drop the prior month, data from the Commerce Department showed today in Washington. Economists in a Bloomberg survey had estimated a 2 percent increase, according to the median forecast.

UniCredit Share Sale

Global stocks fell earlier as UniCredit SpA, Italy’s largest bank, said it will sell new shares in a 7.5 billion-euro ($9.8 billion) offer to strengthen its capital position. The European Central Bank reported overnight deposits from financial institutions rose to an all-time high and Luxembourg Prime Minister Jean-Claude Juncker said the European Union is facing a recession of unknown scope.

Germany sold 10-year bonds today, getting more bids than the amount for sale and kicking off a competition for financing that may determine whether euro-area leaders can preserve the single currency.

Financial shares fell as European lenders tumbled. Bank of America dropped 3.1 percent to $5.62, for the biggest decline in the Dow. JPMorgan Chase & Co. (JPM) lost 1 percent to $34.38.

Yahoo dropped 2 percent to $15.96. The Internet company that is exploring strategic alternatives appointed Thompson chief executive officer, four months after firing Carol Bartz for failing to drive a turnaround. EBay slipped 3.9 percent to $30.12.

TiVo rallied 8.9 percent to $9.72. AT&T agreed to pay at least $215 million to settle the patent lawsuit. TiVo, a pioneer in the market for set-top boxes that can record a TV program and play it back at the same time, had lost customers to offerings from TV-service providers including AT&T. TiVo accused those companies of using its patented time-warp technology.

U.S stock futures rose, indicating the Standard & Poor’s 500 Index will extend its rally for the week, as expansion in U.S. industrial purchases offset weaker- than-forecast consumer spending.

Bank of America Corp. (BAC) advanced 1.5 percent and Citigroup Inc. (C) added 1 percent to lead banks higher. Amazon.com Inc. (AMZN) and Target Corp. (TGT) rose at least 0.9 percent, pacing gains among the largest companies. Rambus Inc. rose 19 percent as the designer of high-speed memory chips settled patent disputes with Broadcom Corp.