US stocks rallied on Tuesday, with the S&P 500 closing at its highest level in more than two months, as a sales forecast by Best Buy dampened concerns high inflation would lead to a dismal holiday shopping season while a bounce in oil prices helped lift energy shares.

Best Buy shot up 12.78 percent as the best performing stock on the S&P 500 index, after the retailer forecast a smaller drop in annual sales than previously announced and expressed confidence a ramp up in deals and discounts will entice more customers.

In contrast, Dollar Tree tumbled 7.79 percent as the worst performing S&P 500 component, which also capped gains for the retail index as the discount retailer cut its annual profit forecast for the second time.

"If you take the continuum of income and consumers out there, the upper half of that is relatively inelastic to some costs going up to some extent or another where the bottom half is going to be more sensitive," said Shawn Cruz, head trading strategist at TD Ameritrade in Chicago.

"So the Dollar Trees of the world really don’t have much ability to pass through those costs so they are going to get hit pretty bad."

The Dow Jones Industrial Average rose 1.18 percent, to 34,098, the S&P 500 gained 1.36 percent, to 4,004 and the Nasdaq Composite added 1.36 percent, to 11,174. The S&P 500 closed at its highest level since September 12.

Also providing support was the energy sector, which climbed 3.18 percent after two sessions of declines as Saudi Arabia said Opec+ was sticking with outputs cuts, shooting down a report on Monday that said the alliance was considering increasing output which sent crude prices sharply lower.

As investors continue to try and gauge the path of Federal Reserve rate hikes, Cleveland Fed President Loretta Mester reiterated on Tuesday that lowering inflation remains critical for the central bank, a day after supporting a smaller rate hike in December. Kansas City President Esther George said the central bank may need to boost interest rates to a higher level and hold them there for longer in order to temper consumer demand and cool inflation.

Investors were also awaiting remarks by St. Louis Fed Reserve President James Bullard on Tuesday ahead of the minutes from the Fed's November meeting scheduled for Wednesday.

Volume was light for the session and is likely to dwindle heading into the Thanksgiving holiday on Thursday, with the US stock market open for a half-session on Friday.

Manchester United shares jumped late in the session after Sky News reported the Glazer family, which owns the football club, was exploring financial options that could include an outright sale, and closed 14.66 percent higher. (Reuters)