Stocks bounced back from a four-day losing streak on Monday, as optimism about upcoming earnings gathered steam and data showed the economy's critical services sector expanded for the first time since August 2008.

Financial stocks rallied, and were the top positive on the S&P 500 index, after Goldman Sachs upgraded the large-cap bank sector. It said share prices for companies in the industry didn't reflect their earnings power. Wells Fargo & Co gained 6.9 percent.

Analysts said investors may be hoping that the strong earnings seen in the second quarter will continue with the third-quarter reports that start this week. In the second-quarter reporting period, more than 70 percent of Standard & Poor's 500 companies beat expectations, driving a sharp rally in stocks.

The Institute for Supply Management's index for the U.S. services sector rose to 50.9 in September, crossing the 50 threshold that indicates expansion and topping expectations. The services sector represents about 80 percent of the U.S. economy.

We are a services economy to a large extent, and finally getting above the 50 level is a pretty positive signal that things are picking up, said Owen Fitzpatrick, head of U.S. Equity Group, Deutsche Bank Private Wealth Management, in New York. We're off to a pretty good start this week with that number.

The Dow Jones industrial average <.DJI> was up 112.08 points, or 1.18 percent, at 9,599.75. The Standard & Poor's 500 Index <.SPX> was up 15.25 points, or 1.49 percent, at 1,040.46. The Nasdaq Composite Index <.IXIC> was up 20.04 points, or 0.98 percent, at 2,068.15.

The market posted its second straight week of losses last week after weak data, including reports on jobs and factory orders, raised doubts about the strength of the recovery.

Investors have been eager for more solid signs of economic stability after the S&P 500's huge run-up since hitting a 12-year closing low on March 9. The index is currently up 53 percent since March 9.

I think the earnings season will be positive overall, Fitzpatrick said. We'll probably hear things are improving and see some areas of top-line growth occurring.

The release of aluminum company Alcoa Inc's results on Wednesday marks the unofficial start of the third-quarter earnings season.

Shares of Alcoa rose 4.7 percent to $13.42.

On the Nasdaq, shares of Brocade Communications Systems Inc surged 18.8 percent to $9.09 after The Wall Street Journal reported that the network equipment maker had put itself up for sale, citing sources familiar with the matter.

Also on the acquisition front, Dutch telecoms group KPN NV raised its buyout offer to minority shareholders of iBasis Inc to $2.25 a share from $1.55 a share. Shares of iBasis, a U.S. voice traffic carrier, surged 7.5 percent to $2.30.

Goldman also upgraded Wells Fargo to buy, and its shares rose to $28.09. The KBW Banks index <.BKX> advanced 3.2 percent while the S&P Financial index <.GSPF> added 3.3 percent.

JPMorgan Chase & Co. , up 4.6 percent at $43.80, was the top gainer on the Dow.

Volume was below average on the New York Stock Exchange, with 1.12 billion shares changing hands, below last year's estimated daily average of 1.49 billion, while on the Nasdaq, about 2.19 billion shares traded, also below last year's daily average of 2.28 billion.

Advancing stocks outnumbered declining ones on the NYSE by a ratio of 5 to 1, while advancing stocks beat decliners on the Nasdaq, by about 19 to 7.

(Editing by Leslie Adler)