Updated at 4:02 p.m. ET: Stocks closed Thursday mixed, giving up an early rally that followed data showing initial jobless claims fell to the lowest level in more than four and a half years.
The number of Americans filing new claims for unemployment benefits dropped by 30,000 to a seasonally adjusted 339,000, according to Labor Department data. Economists polled by Reuters had forecast claims edging up to 370,000 last week.
The report follows last week's government report that showed a surprising drop in September's unemployment rate to 7.8 percent.
"Claims looked pretty strong, definitely a big drop down. We're starting to hear noise about companies hiring, and that's what the market is waiting for," said Jordan Waxman, managing director Hightower Advisors in New York.
"Without labor market improvement, we can't get a sustainable rally. The numbers seem to be moving in the right direction."
Stocks were also supported by a note from Citigroup, which upgraded U.S. equities to "overweight," citing cheap equity valuations and aggressive central bank actions to stimulate the economy.
The benchmark S&P 500 index has shed 2 percent over the past four sessions, its biggest four-day drop since late July, amid concern about the impact of slowing world growth on corporate profits.
Weak global demand has heightened investor worry over the corporate earnings season. As a group, S&P 500 companies' third-quarter earnings are expected to fall 2.9 percent from a year ago, according to Thomson Reuters data for the first decline in three years.
The S&P 500 rose 2.4 percent in September but has dropped 0.6 percent thus far for October as investors' focus has shifted to stock fundamentals.
Other data showed the U.S. trade deficit widened in August, in line with analyst expectations, to $44.2 billion. Overall U.S. exports dropped 1.0 percent, while imports fell 0.1 percent.
Sprint Nextel Corp shares jumped after a source familiar with the matter told Reuters Softbank Corp, Japan's third-largest mobile carrier, is in talks to acquire a majority stake in the No. 3 wireless carrier in the United States.
Winnebago Industries Inc reported a higher quarterly profit and strong growth in its order backlog as demand for its motor homes grew.
Standard & Poor's cut Spain's sovereign credit rating on Wednesday to BBB-minus, just above junk territory, citing a deepening economic recession.
Reuters contributed to this report.
