The Dow and S&P 500 jumped to close at records on Tuesday after minutes from the Federal Reserve's last meeting showed inflation expectations were contained, leaving open the question of whether another rate cut is near.
With the start of earnings season this week, optimism that results would beat what many analysts consider to be low expectations for the quarter also helped bolster stocks.
Alcoa Inc, the aluminum company and Dow component, was to kick off the earnings reporting period by announcing results after the close. Its stock closed up 3.7 percent at $39.72.
Shares of investment banks, which benefit from lower borrowing costs, rose, with the Amex Securities Broker Dealer index up 1.8 percent.
The conclusion that the markets reached is that the Fed probably has a bias not toward raising rates, but probably toward lowering rates, said Mark Coffelt, chief investment officer of Empiric Funds in Austin, Texas.
The Dow Jones industrial average climbed 120.80 points, or 0.86 percent, to end at 14,164.53 -- a record. The Standard & Poor's 500 Index ended up 12.57 points, or 0.81 percent, at a record 1,565.15. The Nasdaq Composite Index finished up 16.54 points, or 0.59 percent, at 2,803.91.
During the session, the Dow reached an intraday record high of 14,166.97 and the S&P hit and all-time high of 1,565.26. The Nasdaq climbed to 2,806.41, its highest level since January 2001.
The minutes from the September 18 Fed meeting also showed that all members of its policy-setting committee agreed to the half-percentage-point interest rate cut to buffer the economy from credit problems.
While stocks rose after the Fed minutes' release, bonds slipped, suggesting investors continue to have an appetite for riskier assets at the expense of bonds.
According to Reuters Estimates, S&P 500 third-quarter earnings are projected to rise 3.2 percent compared with a year ago. The health-care and technology sectors are expected to show the largest gains.
News late Monday that restaurant operator Yum Brands Inc was raising its profit forecast also fed the appetite for stocks. Yum -- parent of the KFC, Pizza Hut and Taco Bell chains -- also announced it plans to buy back up to $4 billion of its stock. Its shares rose 5 percent to $38.11 and earlier hit a record high of $38.34 on the New York Stock Exchange.
The estimates look too low. I think you'll see a number better than people expected, said Rick Campagna, portfolio manager, Provident Investment Council in Pasadena, California.
Shares of Microsoft Corp gained 0.9 percent to $30.09 after Goldman Sachs raised its 2008 profit targets for the software maker.
Also on the Nasdaq, Google Inc surged to a record $623.78, up more than 2 percent, after two brokerages raised their price targets for the Web search company. Lehman Brothers upped its price target to $714, saying it believes Google will launch a mobile phone as early as February. The stock closed up 0.9 percent at $615.18.
Trading was below average on the NYSE, with about 1.19 billion shares changing hands versus last year's estimated daily average of 1.84 billion. On Nasdaq, about 1.89 billion shares traded, below last year's daily average of 2.02 billion.
Rising stocks outnumbered falling ones by a ratio of about 11 to 5 on the NYSE and by 17 to 12 on Nasdaq.
(Additional reporting by Herb Lash)