Stocks rallied on Friday as earnings showed companies have weathered the recession and economic data raised hopes the economic cycle may have hit a bottom.

Investors were also undeterred by a government release of a much anticipated concept paper on stress tests for the 19 biggest U.S. financial services companies.

American Express gave the most fuel to the Dow's rise, shooting up nearly 21 percent to $25.30 a day after reporting results that topped analysts' expectations, helped by aggressive cost cutting.

Ford Motor Co also posted a smaller-than-expected first-quarter loss and said it was on track to at least break even in 2011 and did not expect to seek U.S. government loans, sending its shares up 11.4 percent to $5.

Economic data also fed the buying frenzy after durable goods orders slipped in March, but fell far less than Wall Street expected. Sales of new single-family homes dropped, but inventories plummeted at a record pace.

The earnings news last night, as well as this morning in general, appears to be relatively positive and, at the core, the durable goods orders this morning also provided further indication that the manufacturing sector is showing tentative signs of improvement, said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.

The Dow Jones industrial average <.DJI> added 119.23 points, or 1.50 percent, to 8,076.29. The Standard & Poor's 500 Index <.SPX> rose 14.31 points, or 1.68 percent, to 866.23. The Nasdaq Composite Index <.IXIC> gained 42.08 points, or 2.55 percent, to 1,694.29.

For the week, the Dow fell 0.7 percent and the S&P slid 0.4 percent, while the Nasdaq rose 1.3 percent. The declines for the blue-chip Dow average and the broad S&P 500 snapped a six-week streak of gains.

In contrast, the Nasdaq extended its winning streak to seven straight weeks, its longest string of gains since early May 2007.

On the financial front, the Federal Reserve said the top 19 U.S. banks need to hold a substantial amount of capital above regulatory requirements to weather a potential worsening of the economic recession, according to the Fed's white paper on bank stress tests.

This is very, very basic. You come out of this knowing that the banks have to build up a buffer (for) a tighter, more challenging credit market. They do that anyway, said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey.

The KBW Bank index <.BKX> rose 2.9 percent while the Select Sector SPDR Financial ETF gained 2.6 percent.

Software giant Microsoft Corp provided the biggest boost to the Nasdaq, up 10.5 percent at $20.91, after investors cheered cost-cutting efforts. Investors also appeared to be relieved that the release of Microsoft's Windows 7 operating system was on track and they overlooked a fall in profits.

Shares of online retail giant , up 4.8 percent at $84.46, gave another lift to the Nasdaq after beating profit and sales estimates.

Worries about the banking sector's health helped drive the market to 12-year lows early last month, and since those significant lows, the benchmark S&P 500 has rebounded 28 percent.

Trading was active on the New York Stock Exchange, with about 1.73 billion shares changing hands, above last year's estimated daily average of 1.49 billion, while on Nasdaq, about 2.53 billion shares traded, above last year's daily average of 2.28 billion.

Advancing stocks outnumbered declining ones on the NYSE by 2,332 to 703, while on the Nasdaq, advancers beat decliners by about 1,945 to 762.

(Additional reporting by Ellis Mnyandu and Leah Schnurr)

(Reporting by Chuck Mikolajczak; Editing by Jan Paschal)