Wall Street was encouraged by the latest reading of the Labor Department's Consumer Price Index, which measures how much consumers pay at the retail level. The CPI was unexpectedly flat for June, while "core" CPI — with food and fuel costs removed — edged just 0.1 percent higher.

Record earnings from Apple Computer Inc. also cheered investors, while a sharp 1.7 percent jump in retail sales for June assuaged fears that high oil prices would crimp consumer spending.

"I was very pleasantly surprised by the releases today, with low inflation and very strong retail sales growth. And in general, second-quarter earnings are off to a very strong start," said Lincoln Anderson, chief investment officer at LPL Financial Services. "This is just unalloyed good news, and no dark spots in there that I can see."

The S&P rose 3.21, or 0.26 percent, to 1,226.50, its best showing since closing at 1,234.45 on July 3, 2001.

Other stock indicators also advanced. The Nasdaq composite index climbed 8.71, or 0.41 percent, to 2,152.82 — its best close since Dec. 31 — while the Dow Jones industrial average was up 71.50, or 0.68 percent, at 10,628.89, its highest level since March 16.

Bonds moved lower as stocks rose, with the yield on the 10-year Treasury note rising to 4.18 percent from 4.16 percent late yesterday. The dollar was mixed against other major currencies, while gold prices fell.

Crude oil futures dropped sharply after the International Energy Agency predicted global demand would ease. A barrel of light crude settled at $57.80, down $2.21, on the New York Mercantile Exchange.

Despite the advance, the major indexes pulled back from their session highs as investors collected profits from the past week's run-up in stock prices. The indexes have risen between 3 percent and 4 percent over the last six trading days.

"We're holding on, for the most part, but I think there's been some profit-taking that's kept us from going much higher," said Brian Williamson, an equity trader at The Boston Company Asset Management. "There's a lot of excitement about what's been happening with earnings and the economic data and oil, but we're still hitting a little resistance."

Nonetheless, investors received good news on nearly every point of concern. Yet the question now becomes whether the market will continue to make gains as earning season continues, or whether this is the best short-term result the market can achieve before autumn and the traditional year-end rally.

Retail stocks pushed higher on the positive Commerce Department sales report. Lowe's Companies Inc. hit an all-time high earlier in the session and was up 70 cents at $62.90. Target Corp., which also reached a historic high, gained 52 cents to $58.39, and Best Buy Inc. added 60 cents to $75 after surpassing its all-time high in morning trading.

Apple's earnings boosted the overall tech sector as the computer and electronics maker credited ongoing demand for the iPod music player for its record profits. While Apple took the unusual step of warning that its third-quarter profits would fall below expectations, investors weren't dissuaded. Apple stock surged $2.40, to $40.75.

Advanced Micro Devices Inc. rose 63 cents to $19.88 after the chip maker reported a 65 percent drop in profits, yet still beat Wall Street profit forecasts by 8 cents per share. While analysts expected the company to post a loss for the quarter, record microprocessor sales helped the company overcome a sharp drop in demand for flash memory chips.

In a rare bit of good news for the airline sector, Southwest Airlines Inc. had a 41 percent surge in profits for the second quarter. The company credited fare increases and rising passenger traffic for helping overcome rising fuel prices. Southwest climbed 44 cents to $14.42 and lifted other airline stocks as well. AMR Corp., parent of American Airlines, gained $1.08 to $13.87, while Delta Air Lines Inc. rose 61 cents to $4.05

The struggling automotive sector also got a boost, with General Motors Corp. jumping $1.13 to $37 after analysts at Lehman Brothers upped the stock to "equal weight" from "underweight." Ford Motor Co. added 20 cents to $10.89 as well. Both stocks also benefited from strong auto sales reported in June.

Yum Brands Inc., parent of the Taco Bell and KFC fast food chains, dropped $1.86 to $49.85 despite reporting a rise in second-quarter profits that beat Wall Street expectations by 5 cents per share. The company warned that its future earnings would fall below analysts' projections.

Declining issues outnumbered advancers by about 8 to 7 on the New York Stock Exchange, where preliminary consolidated volume came to 2.02 billion shares, compared to 1.82 billion yesterday.

The Russell 2000 index of smaller companies fell 4.63, or 0.69 percent, to 663.02.

Overseas, Japan's Nikkei stock average rose 0.9 percent. In Europe, Britain's FTSE 100 was up 0.26 percent, France's CAC-40 gained 0.63 percent for the session, and Germany's DAX index climbed 0.41 percent.