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Tax Cut Hopes Fuel Wall St. Rally

Stocks surged Monday as investors bet that President Bush's $600 billion economic stimulus package, which will be announced Tuesday, will help boost corporate profits.

The Dow Jones industrial average surged 171.88 points, or 2 percent, to 8,773.57, while the broad S&P 500 gained 20.42 points, or 2.25 percent, to 929.01. The technology-packed Nasdaq Composite Index rose 34.17 points, or 2.46 percent, to 1,421.25.

Bush is expected to announce the details of a $600 billion economic stimulus package on Tuesday that will include proposals to eliminate taxes on dividends, speed up reductions in income tax rates and allow companies to quickly write off more of their investments.

"We're seeing very constructive signs of lower tax rates and stimulus in the economy, which should help spur growth and, more importantly, spur some capital investment," said Michael Vogelzang, president of Boston Advisors, Inc.

Shares of local telephone companies, such as Verizon Communications , surged after sources close to the situation said U.S. regulators may phase out rules that require phone companies to share their networks with rivals.

Semiconductor equipment stocks also raced higher, bolstering the Nasdaq market, after Deutsche Bank Securities raised its investment rating on the sector.

Also, JP Morgan raised its rating on U.S. equities in its global portfolio to "overweight" from "neutral" and cut its rating on United Kingdom equities, saying U.S. stocks posed a better chance of future gains.

Investors were also anxious to put money to work at the start of year, hopeful that the new year will bring better days for corporate America.

"When you get to the beginning of the year, people are more optimistic and they're looking forward 12 months as opposed to looking forward 12 days as you do at the end of the year," said John Forelli, portfolio manager at Independence Investments LLC.

Trading volumes were heavy, with about 1.4 billion shares traded on the New York Stock Exchange and about 1.5 billion shares traded on Nasdaq.

The White House said on Monday that its stimulus plan, aimed at jump-starting the struggling U.S. economy, would give nearly 100 million taxpayers an average tax cut of $1,083.

Bush is expected to officially announce the details to the Economic Club of Chicago on Tuesday. Congressional Democrats said Bush's plan would be fiscally irresponsible.

Administration officials also believe elimination of taxes on dividends, which will cost as much as $300 billion over 10 years, could boost stock prices by 10 percent or more.

Stocks of companies that pay dividends jumped. Investment bank J.P. Morgan Chase & Co. advanced $2.04, or 8 percent, to $27.98.

Hopes for a pickup in growth helped economically sensitive financial stocks overall, lifting the Philadelphia Stock Exchange's Bank Index more than 3 percent.

Shares of local telephone companies surged, driving gains in the S&P 500 and the Dow on talk of a possible change in U.S. telecommunications regulations that would limit competition.

Verizon (VZ) soared $3.62, or 9 percent, to $44.07, while BellSouth Corp. jumped $2.13, or 8 percent, to $29.25. SBC Communications Inc. (SBC) advanced $2.31, or 8 percent, to $31.19, and Qwest Communications International Inc. (Q) rose 56 cents, or 10 percent, to $5.93.

AT&T Corp. (T) , however, slipped 18 cents to $27.48 after the largest U.S. long-distance telephone company said it will take a $240 million restructuring charge as it cuts about 3,500 jobs amid shrinking revenue and stiff competition.

Chip equipment makers helped bolster the Nasdaq market, sending the Philadelphia Stock Exchange's Semiconductor Index up 6 percent after Deutsche Bank upgraded its rating on the sector to "buy." Applied Materials (AMAT) jumped 88 cents, or 6 percent, to $15.41, Novellus Systems rose $2.37, or 8 percent, to $33.57, and Lam Research (LRCS) surged $1.06, or 9 percent, to $12.57.

Recent signs that the economy may be struggling out of the doldrums also gave investors a reason to dive back into the stock market.

The latest economic data showed a decline in the U.S. services sector from previous levels, but it was above a benchmark level, suggesting that growth in some segments of the U.S. economy is still on track.

The Institute for Supply Management's index of non-manufacturing data slipped to 54.7 in December, lower than the 55.9 expected by economists and down from November's 57.4. But it was above 50, the dividing line between growth and contraction.

The Russell 2000 index, which tracks smaller company stocks, rose 6.69, or 1.7 percent, to 397.00.

Overseas, Japan's Nikkei stock average finished Monday up 1.6 percent. In Europe, France's CAC-40 rose 0.7 percent, Britain's FTSE 100 slipped 0.1 percent and Germany's DAX index climbed 2.1 percent.

Reuters and the Associated Press contributed to this report.