NEW YORK (Reuters) - Stocks edged higher on Monday, shaking off a surprise contraction in manufacturing, which some investors took as a signal the Federal Reserve will take more forceful actions to boost the economy.
The Institute for Supply Management's manufacturing index came in at a lower reading than expected in June, registering a contraction in the sector for the first time since July 2009.
The S&P was lower for much of the session but closed slightly higher in late gains. Still, industrial shares were under pressure after the data, the latest in a string of indicators pointing to deteriorating economic conditions around the globe. Boeing Co (BA.N) lost 1.5 percent to $73.18 and Caterpillar Inc (CAT.N) was off 1.4 percent at $83.68.
The weak data supported the view that conditions were worsening, and investors said it made the Fed more likely to adopt additional easy money policies, like a third round of quantitative easing.
"The ISM reading was pretty weak. But it is pretty positive that the market had an excuse to sell off and instead we're resilient," said Mike Gibbs, chief market strategist at Morgan Keegan in Memphis, Tennessee.
"This gives investors a little more confidence that QE3 may be in the cards at some point."
Euro zone manufacturing shrank again in June and factories are preparing for worse, according to business. Manufacturing in China also weakened in June with export orders.
In a sign of fading expectations for the stock market, UBS cut its year-end target on the S&P 500 index to 1,375 from 1,475, implying that the market would only rise about 1 percent from current levels over the next six months.
The firm's equity analyst, Jonathan Golub, cited deterioration in the U.S. economy; the Supreme Court's healthcare ruling, which he says will mean greater partisanship ahead of important budget debates; and a more contentious tone among European policymakers.
The Dow Jones industrial average .DJI was down 8.70 points, or 0.07 percent, at 12,871.39. The Standard & Poor's 500 Index .SPX was up 3.35 points, or 0.25 percent, at 1,365.51. The Nasdaq Composite Index .IXIC was up 16.18 points, or 0.55 percent, at 2,951.23.
The next Fed policymaking meeting is July 31-August 1. Investors are also awaiting the European Central Bank's meeting on Thursday to see if it will lower interest rates below 1 percent. Economists are split on the likelihood of such a move.
Mergers and acquisitions helped support stocks. Amylin Pharmaceuticals Inc AMLN.O rose 8.9 percent to $30.71 after Bristol-Myers Squibb Co (BMY.N) agreed to buy the company for $5.3 billion. Bristol-Myers rose 0.3 percent to $36.05.
Dell Inc DELL.O will buy Quest Software Inc QSFT.O for $2.4 billion, while Ingram Micro Inc IM.N agreed to buy BrightPoint Inc CELL.O for about $650 million.
Shares of Dell fell 1 percent to $12.39 while Quest was flat at $27.82. Computer equipment maker Ingram rose 0.5 percent to $17.55 while wireless company BrightPoint soared 66.5 percent to $9.01 on heavy volume.
Best Buy (BBY.N) jumped 5.9 percent to $22.20 as takeover expectation continued around the electronics retailer. On June 26, Best Buy founder Richard Schulze was reported by the Wall Street Journal to be exploring a buyout of the company in combination with Credit Suisse CSGN.VX.
UBS was not alone in taking a more bearish view of the U.S. equity market. Morgan Stanley said the second-quarter earnings season is likely to disappoint when it begins with Alcoa Inc (AA.N) next week.
"By now it is clear that the U.S. earnings season will be softer than was forecast a couple of months ago," wrote the firm's U.S. equity strategist, Adam Parker, in a research note.
"We would not be surprised to see negative pre-releases this week or notably weak guidance for October beginning the following week."
About 67 percent of shares traded on the New York Stock Exchange closed higher on Monday while 62 percent of Nasdaq-listed shares closed higher.
Volume was light, with about 6.1 billion shares traded on the New York Stock Exchange, the American Stock Exchange and Nasdaq, below last year's daily average of 7.84 billion.
Editing by Kenneth Barry