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Stocks rally on corporate profit reports

Stocks rallied Wednesday, with the S&P 500 touching its highest level since early May, as corporate profits from bellwethers like Intel and Honeywell defied the market's worst fears.

The Dow Jones industrial average gained 103 points.

Corporations, nonetheless, are cautious about a slowing economy, lifting the market's hopes for further stimulus from the Federal Reserve.

Fed Chairman Ben Bernanke repeated in congressional testimony on Wednesday the Fed's pledge to act if the economy needed it as he underscored his concerns, specifically in the job market.

Honeywell Inc's profits topped consensus views in what it called a "tough macroeconomic environment."

Chipmaker Intel Corp reduced its growth forecast also on macro concerns, but its gross margins were healthy.

"The main driver is technology and that is driven by Intel," said Michael James, senior trader at regional investment bank Wedbush Morgan in Los Angeles. "People were overly pessimistic on Intel and semiconductors in general going into Intel's report and guidance last night, so it's a 'buy the news.'"

Data storage equipment maker EMC Corp also boosted tech shares after it replaced the head of its VMware Inc unit and reported a preliminary second-quarter profit.

Vivus shares jumped after regulators approved the company's weight-loss drug.

"The theme coming out in earnings is companies are coming in short in revenue but still beat on earnings. Analysts have moved their targets (lower) and companies still are lean and mean and are able to generate profit," said Kim Forrest, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

She said the market "really, really wants QE3," or more monetary stimulus from the Fed. "Bernanke is painting a dire picture and the bulls in the market are holding out for more Fed action."

Shares of Starbucks fell after Cleveland Research Co said sales momentum for the coffee maker slowed in June.

According to the report obtained by Reuters, analysts at Cleveland Research said they were trimming the company's comparable sales estimates for the Americas region 7 percent to 8 percent for the third quarter. It had expected comparable sales to grow 8 percent to 9 percent earlier.

Shares of Rovi fell to their lowest in 3-1/2 years after the digital media solutions provider slashed its profit forecast for the year and two brokerages downgraded its stock.

Groundbreaking on U.S. homes rose in June to its fastest pace in over three years, lending a helping hand to an economy that has shown worrisome signs of cooling.

Reuters contributed to this report.