U.S. stocks advanced Monday, led by tech shares, as brokerage upgrades on bellwether companies such as International Business Machines Corp. (IBM) boosted investor optimism about the sector's outlook.

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The Dow Jones industrial average rose 25.48 points, or 0.21 percent, at 12,423.49 while the Standard & Poor's 500 Index advanced 3.13 points, or 0.22 percent, at 1,412.84. The Nasdaq Composite Index climbed 3.95 points, or 0.16 percent, at 2,438.20.

Shares of retailer Gap Inc. rose 7.3 percent on a report that it had hired Goldman Sachs to explore strategic alternatives. Gap declined to comment.

IBM shares rose 1.5 percent at $98.90 and were the biggest positive on the Dow and the second-biggest boost to the S&P 500 index after UBS raised its rating on the stock. UBS also lifted its rating on tech sector stocks and the semiconductor sector.

"There is still a vast sea of money around and tech is beginning to stand out as a good candidate," said Eric Kuby, chief investment officer with North Star Investment Management, Chicago. "Valuations in the tech sector remain pretty compelling."

A speech by Federal Reserve Vice Chairman Donald Kohn also helped shares after he said the U.S. economy is poised for moderate growth and lower inflation, easing concerns after minutes from the Fed's December meeting released last week showed some Fed officials felt risks to economic growth had increased.

But a brokerage downgrade of retailer Wal-Mart Stores Inc. (WMT) helped temper share gains.

Goldman Sachs downgraded the retailer, saying weak sales suggest returns from earlier investments by the world's biggest retailer will take longer than originally expected. Goldman cut its price target to $51 from $53 and Wal-Mart shares fell 0.8 percent to $47.

Gap's stock rose as high as $21.04 on the New York Stock Exchange in its biggest one-day percentage gain in five years before closing at $20.26. Sources familiar with the matter said that the company has hired Goldman Sachs to explore strategic alternatives. CNBC had originally reported the hiring.

In other tech news, JPMorgan Securities raised its first-quarter 2007 earnings per share estimates for Apple Computer Inc. by a penny, primarily due to greater-than-expected sell-through of iPod Shuffle music player. Apple shares rose 0.5 percent to $85.47 on Nasdaq.

Anticipation about potential new product news coming out of the Macworld conference starting on Tuesday further aided Apple shares.

The fourth-quarter earnings reporting period kicks off Tuesday with a report from Dow component Alcoa Inc. Shares of top aluminum producer Alcoa fell 1 percent to $28.48.

Reuters Estimates forecast earnings growth of 9.9 percent for the fourth quarter, a slightly higher forecast than last week's estimate.

Trading was moderate on the New York Stock Exchange on Monday where about 1.57 billion shares changed hands, below the 1.84 billion daily average for last year. On Nasdaq, about 1.95 billion shares traded, also below the 2.02 billion daily average last year.

Advancing shares beat decliners by about 3 to 2 on the NYSE and were nearly equal on Nasdaq.

Both the S&P 500 and the Dow Jones industrial average started 2007 on the defensive. In the three-session opening week, the Dow dropped 0.52 percent, while the S&P 500 lost 0.61 percent.

Only the Nasdaq managed to squeeze a slight gain for the week, rising 0.78 percent.

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