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Stocks Rally, S&P at Best Level Since Dec 2007; Banks Lag

Stocks ended sharply higher Thursday, with the S&P 500 at its best level in more than five years, as Wall Street cheered a pair of encouraging data and largely shrugged off weakness in financials.

(Read More: After-Hours Buzz: INTC, AXP & More)

"For the last four or five trading sessions, the market has been challenging and testing the 2012 high and we'll have to watch if we stay above it," said Kenny Polcari, director of floor operations at O'Neil Securities. "Today,we're rallying on better jobs and housing numbers."

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The Dow Jones Industrial Average ended just short of a five-year high, rallying 84.79 points, or 0.63 percent, to close at 13,596.02. Intel and Home Depot led the blue-chip gainers, while Bank of America lagged.

The S&P 500 climbed 8.31 points, or 0.56 percent, to finish at 1,480.94. The S&P hit an intraday high of 1,485.16, its highest level since December 28, 2007, when the index traded at 1,488.01. The Nasdaq gained 18.46 points, or 0.59 percent, to end at 3,136.00. (Read More: Forget Dow Theory: Small Caps May Be Better)

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, rose to close above 13.

Most key S&P sectors closed in positive territory, led by consumer discretionary and industrials, while financials ended lower.

"This is a big technical level and if we hold, the [S&P 500] can rise to at least 1,507-1,520 before hitting another resistance," noted Uri Landesman, president of Platinum Partners. "But we still have issues with the debt ceiling and as the lack of cooperation between the two parties continues throughout the quarter, we're going to get people who are nervous."

On the economic front, jobless claims fell 37,000 to a seasonally adjusted 335,000, hitting a five-year low, according to the Labor Department. The four-week moving average declined to 359,250. And housing starts jumped 12.1 percent to a 954,000-unit annual rate in December, accelerating to its fastest pace since June 2008, according to the Commerce Department.

Most homebuilders traded higher following the report, led by Pulte and Toll Brothers.

Among earnings, Citigroup posted a wide earnings miss, with the new CEO citing a "challenging" environment due to increased regulatory pressures and legal costs. Still, shares eased off their lows after CLSA upgraded the company to "outperform" from "buy."

Bank of America topped expectations but reported a profit that was lower than a year ago, pressured by mortgage-related problems, sending shares sharply lower.

On Wednesday, Goldman Sachs and JPMorgan both posted results that beat expectations. Rival financial giant Morgan Stanley is scheduled to post earnings Friday. (Read More: Forget Earnings: What Wall Street's Really Watching)

United Health edged higher after the Dow component posted earnings that matched expectations and topped revenue estimates. The health insurer reiterated its forecast for 2013 revenue growth and added earnings would be in a range of slightly down to up 4 percent.

BlackRock rallied to a three-year high after the money manager said its earnings jumped 24 percent, boosted by increased demand for equities.

Intel, American Express and Capital One are scheduled to post earnings after the closing bell.

So far, 51 S&P 500 firms have posted quarterly results this quarter, with 61 percent of companies reporting earnings above expectations and 69 percent beating revenue estimates, according to Thomson Reuters.

The Federal Aviation Administration grounded all Boeing 787 planes until the aircraft are proven to be safe to fly following a string of issues in recent weeks. Japan's All Nippon Airways, which currently has 17 Dreamliners, said it will cancel a total of 30 domestic and international flights Friday, affecting nearly 5,000 passengers. Boeing shares, which started the session in the red, rebounded to close higher. (Read More: Are Dreamliner Glitches Just 'Teething Issues?')

CBS soared to lead the S&P 500 gainers after the media company announced new steps to divest itself of its outdoor advertising business. And at least seven brokerages lifted their price target on the firm.

Apple dipped after JPMorgan and BMO cut their price target on the iPhone giant to $725 and $640, respectively.

Cisco Systems slipped after JPMorgan cut his rating on the networking-equipment company to "underweight" from "neutral."

Traders largely shrugged off a weak mid-Atlantic region that showed a decline in January, according to the Philadelphia Fed survey.

And worries over the debt ceiling lingered as U.S. lawmakers haggle over raising the $16.4 trillion federal borrowing limit. (Read More: Four Ways to Protect Against the Debt Ceiling)

"We doubt the last minute deal to avert the fiscal cliff tax increases did much to boost business confidence in early January, not when it only raised the prospect of an equally disruptive debt ceiling stand-off within another few weeks," wrote Amna Asaf, an economist at Capital Economics in a note.

—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)

Coming Up This Week:

THURSDAY: Earnings from American Express, Intel, Capital One
FRIDAY: General Electric, Schlumberger, Morgan Stanley

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