U.S. stocks rose on Wednesday, adding to the previous session's surge and lifting the Standard & Poor's 500 index by 1 percent, as investors bet the Federal Reserve's aggressive rate cut would help prevent an economic slowdown.

The U.S. central bank slashed its benchmark federal funds rate by half a percentage point on Tuesday to shield the economy from ailing credit markets and the prolonged housing slump. Global equities powered higher after the Fed's move.

Housing-related stocks such as home builders and mortgage financiers were among the biggest percentage gainers on the S&P 500. Shares of major banks, which usually benefit from a drop in short-term rates, surged.

In more good news for the mortgage industry, shares of Fannie Mae and Freddie Mac soared after the regulator for the two mortgage finance companies said they can buy more subprime mortgages under rules unveiled on Wednesday.

What we are seeing today is a carry-through from the 50 basis point rate cut that shocked us all yesterday. The financials are loving it, said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

But he said the rally was likely to run out of steam as investors took the chance to lock in profits.

The Dow Jones industrial average was up 104.37 points, or 0.76 percent, at 13,843.76. The Standard & Poor's 500 Index was up 15.20 points, or 1.00 percent, at 1,534.98. The Nasdaq Composite Index was up 23.89 points, or 0.90 percent, at 2,675.55.

But signs of fallout from credit market turmoil continued to lurk in the background, with investment bank Morgan Stanley's earnings missing analysts' estimates.

Morgan Stanley was the second major investment bank this week to report earnings, coming hot on the heels of Lehman Brothers Holdings Inc, which reported earnings that beat Wall Street's estimates on Tuesday. Bear Stearns Cos Inc and Goldman Sachs round out the brokerage earnings week on Thursday.

Morgan Stanley shares slipped 0.2 percent to $68.40. S&P financials rose 1.3 percent.

The Dow Jones home builder index rose 3.7 percent and the KBW Mortgage Finance index added 2.9 percent. Fannie Mae's shares were up 4.5 percent to $65.36 and Freddie Mac's stock gained 3.8 percent to $61.80.

Concerns about price rises after the Fed's rate cut were allayed after Labor Department data showed core inflation rose as expected last month and matched a rise in July.

In other economic data, the Commerce Department said U.S. housing starts in August were slightly lower than expected by economists. It was the lowest pace for housing starts since June 1995.