"The [inflation] data was really positive and it turned us off of the concerns over Wal-Mart and Home Depot," said Kevin Kruszenski, head of trading at KeyBanc Capital. "There's also a thesis that there's now this shortage of stocks with all the corporate buy-backs and the private buyouts we're seeing."
The Dow Jones Industrial Average was up 114 points at 13,461, just off a new record high of 13,481. The Dow was lifted by shares of General Motors Corp , Alcoa Inc. , 3M Co. and McDonald's Corp. .
Home Depot also recovered from early selling pressure. It was down 0.3% after earlier falling nearly 3%. The home-improvement retailer said profits fell 30% in the first-quarter, coming below expectations. It also said annual earnings would be at the low end of guidance amid a challenging housing market.
Wal-Mart Stores also recovered from early weakness. The retail giant's first-quarter earnings met lowered forecasts but its second-quarter outlook came at the lower end of Wall Street expectations.
Meanwhile, deal news and other corporate news continued to feed investor appetite on Tuesday.
Ingersoll Rand Co. surged 7.3% and was among the most actively traded stocks on the New York Stock Exchange. The company said it is exploring the sale of spin-off of its Bobcat and construction-related businesses. Its board also doubled the manufacturing company's share repurchase program to $4 billion from $2 billion.
The broad S&P 500 index gained 8.5 points to 1,511, while the Nasdaq Composite reversed early weakness. The tech-heavy index was up 2.6 points at 2,549.
Trading volumes showed 914 million shares exchanging hands on the NYSE and 1.2 billion on the Nasdaq stock market. Advancing issues topped decliners by 19 to 12 on the NYSE and by 15 to 14 on the Nasdaq.
Agilent Technologies jumped 6% after its current quarter earnings per share and revenue outlook topped analyst estimates.
Yahoo! Inc. fell 0.7% after after it announced that Blake Jorgensen, a founder of Thomas Weisel Partners, will become the company's chief financial officer on June 4.
Slow growth, slow inflation
Stock futures reversed early weakness after news that the consumer price index rose 0.4% in April, below the 0.5% expected by Wall Street economists.
Excluding food and energy prices, the so-called core CPI rose 0.2%, in line with expectations, and cutting the annual gain in the core down to a one-year low of 2.3%.
"The market is relieved that the core rate of inflation hasn't edged up," said Peter Cardillo, chief market economist at Avalon Partners. "It's bringing us closer to where the Fed would like the core rate to be. The next thing the market will want to know is that a Fed cut is coming."
Even with inflation out of the way, the key remains whether the slumping housing market eventually hits employment and consumption, economists believe.
Also on Tuesday, the National Association of Home Builders said that tightening lending standards further shook homebuilders confidence. The NAHB's housing market index fell back to a 16-year low.
Still, the shares of homebuilders were only mildly affected by the report, with KB Home falling 0.8%, while Hovnanian Enterprises rose 0.9%.
Meanwhile, news that conditions for New York area manufacturers improved slightly in May, in line with expectations, had little impact on trade.
The dollar fell against major rivals after the CPI data.
Treasury bonds advanced, with the benchmark 10-year Treasury bond up 5/32 at 98 19/32 in price, wile its yield, which moves inversely, fell to 4.680%.
Oil futures turned higher, adding 61 cents to $63.07 a barrel. Traders weighed worries about tight U.S. gasoline inventories ahead of tomorrow's data releases, along with concerns over oil supply disruptions in Nigeria.
Gold futures rose $1.70 to $671.80 an ounce.
More deal news
The market continued to be fed with more deal news on Tuesday.
On Monday, the Dow industrials gained while the rest of the market struggled. News that DaimlerChrysler AG agreed to sell 80% of Chrysler to a private equity firm had helped buoy the auto sector, including rivals General Motors Corp. and Ford Motor Co. .
On Tuesday, Reuters backed a $17.2 billion offer from Thomson Corp. that valued the financial news and data provider at $82.23 per share. Importantly, a foundation designed to preserve Reuters news integrity which holds blocking power opted to back the deal as well.
American International Group agreed to pay $813 million, or $22 a share, for the roughly 40% it doesn't already own in 21st Century Insurance Group .
Germany's HeidelbergCement agreed to buy Britain's Hanson in a $15.8 billion deal in the building materials business.
Beckman Coulter won't lift its $90-a-share bid for Biosite , which has backed a $92.50 a share offer from Inverness Medical .
By Nick Godt