The market Tuesday took a break from a three-week rally.
Stocks posted modest gains following a surge that pushed the Standard & Poor's 500 index above 1,000 on Monday for the first time since November.
Reports showing an uptick in consumer spending and a fifth straight monthly increase in pending home sales gave investors new signals that the economy is stabilizing.
The Dow Jones industrial average rose 33.63, or 0.4%, to 9,320.19. The S&P 500 index rose 3.02, or 0.3%, to 1,005.65. The Nasdaq composite index rose 2.70, 0.1%, to 2,011.31.
Three stocks rose for every two that fell on the New York Stock Exchange. Volume came to 1.2 billion shares.
The market found more good news in Caterpillar's confirmation that cost cuts and other initiatives will enable the heavy equipment maker to post profits over the long term no matter the pace of the economic recovery.
The world's largest maker of construction and mining equipment is considered a bellwether of the global economy. Shares of the Dow component rose more than 4%.
Even with mostly upbeat economic news, investors looked to lock in some profits following a 14% climb in the S&P 500 index and the Dow since July 10.
"There is a lot of concern that the market has moved too far too fast and that we've gotten ahead of the economy," said Brian Bush, director of equity research at Stephens Inc. "So there may be a pause here."
Analysts generally believe the market's near-term trajectory is upward, with investors seeing dips as an opportunity to put money to work.
Financial, industrial and consumer discretionary stocks were among the best performers as investors placed bets on areas of the market that stand to benefit the most when the economy is growing again.
Investors have seen better-than-expected corporate earnings reports and encouraging outlooks this summer as well as improvements in manufacturing and housing. Those promising signs have driven hopes that the nearly two-year-long recession is coming to an end, pushing stocks up to levels not seen since last fall.
"Everyone that I am talking to is interested in getting more money into the market," said Brian Bush, director of equity research at Stephens. "People don't want to miss this market if it is going significantly higher."
The market's gains on Tuesday were held in check, however, by the government's looming jobs report.
Unemployment currently stands at a 26-year high of 9.5%, and that rate is expected to rise as high as 10% this year. Analysts warn that a huge negative surprise in the Labor Department's monthly jobs data could rattle the market.
Investors are more optimistic about the economy, and more confident in companies' ability to make money, than they were last fall at the peak of the financial crisis. But concerns about the financial health of consumers as well as rising unemployment have yet to subside.
"This market will be prone to pullbacks," said Janet Engels, senior vice president and director of private client research group at RBC Wealth Management. "I'm optimistic that the economic data has stabilized, I'm optimistic that earnings are beating expectations, but a return to growth is not necessarily a return to health."
On Tuesday, the National Association of Realtors reported a better-than-expected rise in pending home sales for a fifth straight month in June. However the housing sector has begun to show steady signs of stabilization, and the market has largely factored in improvements there.
Earlier Tuesday, the Commerce Department said consumer spending rose 0.4% in June, slightly more than anticipated and the second straight monthly gain. But the report also showed that personal incomes, an indicator of future spending, dropped by a larger-than-expected 1.3%.
Among the day's earnings news, homebuilder D.R. Horton DHI reported a smaller loss than the same period a year ago, beating Wall Street's estimates, while Toyota posted a smaller-than-expected loss on booming sales of its Prius hybrid. That came a day after U.S. automakers reported better sales for July thanks to the government's wildly successful cash for clunkers program.
On Monday, all major stock indexes rose more than 1% to fresh highs for the year, tacking on to July's big advance that sent the Dow up 725 points. Major indexes are still down 35% from their peak in October 2007.
Bond prices reversed early gains and fell. The yield on the benchmark 10-year Treasury note, a widely used benchmark for mortgages and other kinds of loans, rose to 3.72% from 3.64% late Monday.
The dollar was mixed, while gold prices rose.
Oil prices shed 16 cents to $71.42 a barrel on the New York Mercantile Exchange.
Overseas, Japan's Nikkei stock average rose 0.2%, while Hong Kong's Hang Seng index dipped 0.1%. Britain's FTSE 100 and Germany's DAX index both lost 0.2%, and France's CAC-40 slipped 0.04%.