U.S. stocks rose early Thursday, putting the S&P on track for its third straight advance after Bank of America and Morgan Stanley earnings lifted financials and strong demand at European bond auctions eased euro zone debt concerns.

Bank of America Corp climbed 4.4 percent to $7.10 as the top boost to the benchmark S&P. The bank reported a fourth-quarter profit, reversing a year-earlier loss, boosted by one-time items and lower expenses for bad loans.

Fellow financial Morgan Stanley jumped 4.6 percent to $18.15 after the Wall Street bank posted a quarterly loss but still managed to top analysts' expectations.

It's the reaction to Morgan Stanley and Bank of America, to their earnings reports. People were expecting absolute disaster, it wasn't an absolute disaster and people looked at those numbers and walked away thinking both those companies wouldn't need to raise more capital, said Stephen Massocca, managing director at Wedbush Morgan in San Francisco.

Financial shares have rallied since the start of the year. The S&P financial index <.GSPF> is up 8 percent for 2012, helping to push the S&P 500 up more than 4 percent. The financial index was up 0.8 percent for the session.

But gains were muted as investors showed some cautiousness after a rally that has sent the S&P 500 to levels not seen since late July.

We are due for at least some consolidation. We had a pretty good rally here and we broke out above the old October high so it's only natural that we get some backing and filling here, said Massocca.

The Dow Jones industrial average <.DJI> rose 28.91 points, or 0.23 percent, at 12,607.86. The Standard & Poor's 500 Index <.SPX> was up 5.33 points, or 0.41 percent, at 1,313.37. The Nasdaq Composite Index <.IXIC> put on 18.74 points, or 0.68 percent, at 2,788.45.

In a sign that investor nervousness over the euro zone's debt crisis was easing, Spain and France both drew strong demand at government debt auctions.

The Nasdaq got a boost from eBay Inc , which reported better-than-expected results after the close on Wednesday. The stock was up 4.8 percent to $31.80.

Transportation stocks moved higher after Union Pacific Corp reported higher quarterly profit and revenue that beat estimates. Union Pacific was up 3.8 percent to $114.02, while the Dow Jones Transportation Average <.DJT> gained 1.4 percent.

New data generally supported the view the U.S. economy continued to improve at a moderate pace. Weekly jobless claims dropped to a near four-year low, consumer prices showed inflation remained in check, while factory activity in the Mid-Atlantic region edged up, but less than expected.

However, housing starts dipped, suggesting the sector was still a ways from strengthening.

After the close, quarterly reports are due from technology bellwethers Google Inc , International Business Machines Corp , Intel Corp as well as Microsoft Corp .

(Reporting By Chuck Mikolajczak; editing by Jeffrey Benkoe)