Stocks soared to set fresh closing highs on the first day of August, propelling the S&P 500 above the 1,700 mark for the first time, as Wall Street cheered a round of upbeat economic data and ahead of the widely-watched government jobs report.
"The rising asset prices will help instill confidence and that will breed more confidence," said Matthew Kaufler, portfolio manager of the Clover Value Fund at Federated. "However, we've had a great run in the market and at some point there will be a correction in the near point…still, my sense would be that there's enough momentum that we'll end the year up a few percentage points higher than where we currently are."
Major averages also closed out their best July since 2010 on Wednesday. So far this year, the Dow and S&P 500 have spiked more than 19 percent, while the Nasdaq has surged an impressive 21 percent.
(Read more: Short the S&P at all-time highs? Absolutely!)
The Dow Jones Industrial Average spiked 128.48 points, or 0.83 percent, to finish at 15,628.02, lifted by American Express and Bank of America. ExxonMobil was among the few Dow component in the red.
The S&P 500 soared 21.14 points, or 1.25 percent, to close at 1,706.87. The Nasdaq rallied 49.37 points, or 1.36 percent, to end at 3,675.74. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, slid below 13.
All key S&P sectors closed in positive territory, led by financials and industrials.
On the economic front, weekly jobless claims dropped to a 5-1/2 year low, according to the Labor Department. And the number of planned layoffs at U.S. firms declined modestly in July, with employers announcing 37,701 cuts last month, down 4.2 percent from June, according to the report from consultants Challenger, Gray & Christmas.
The reports came ahead of Friday's widely-watched government job report. Analysts polled by Reuters expect to see a gain of 184,000 in July, after a 195,000 uptick in the previous month.
(Read more: July jobs report key to Fed action)
"The jobs numbers have been decent as of late, but the problem is the quality of employment," said Lance Roberts, chief economist at StreetTalk Advisors. "There's also clearly a divergence between the stock market and real economy and that's because of the artificial stimulus from the Fed. The problem is that they're not seeing that stimulus being translated into the economy so the worry we should have is that we're inflating valuations and the issue of potentially blowing an asset bubble is very real."
On Wednesday, the Federal Reserve did not signal when it would start tapering its bond-buying program. However, it did raise concerns about rising mortgage rates and flagged the risks of inflation falling too far below its target. In addition, the central bank slightly downgraded its outlook for economic growth.
In another positive sign, the pace of growth in the U.S. manufacturing sector accelerated in July to the highest level since June 2011 as new orders surged, according to the Institute for Supply Management. However, construction spending unexpectedly declined in June, according to the Commerce Department, the biggest decline since January.
Asian stocks rallied after China's official PMI (purchasing manager's index) data showed the country's manufacturing sector continued to expand in July, defying forecasts of a contraction. But the picture was mixed, with a private gauge of factory activity by HSBC showing an 11-month low of 47.7 in July. Japan's Nikkei rallied to a one-month peak on the news, the Shanghai Composite hit a one-week high and South Korea's Kospi touched a seven-week high.
"Official PMI is more skewed to larger companies, and the HSBC figure reflects the smaller companies and that is where you get this divergence," said Frederic Neumann, co-head of Asian economics research at HSBC.
In Europe, the European Central Bank kept its main interest rate unchanged at a record low of 0.5 percent, and reiterated that rates would remain at present or lower levels for an extended period of time.
"Labor market conditions remain weak. Looking ahead to the remainder of the year and 2014, euro area growth should benefit from a gradual recovery in global demand," said ECB president Mario Draghi in a press conference following the announcement. "Our monetary policy stance remains accommodative for as long as necessary. We have unanimously confirmed the forward guidance we gave last time."
Euro zone manufacturing activity grew for the first time in two years in July, with the purchasing manager's index (PMI) climbing to 50.3 in July. A reading above 50 indicates an expansion.
And the Bank of England left its interest rates unchanged at 0.5 percent, as expected, under its new governor, Mark Carney.
However, fellow Dow component Exxon Mobil traded lower after the oil giant posted a profit that badly missed forecasts as oil and gas output dropped and earnings for its refining business fell. Meanwhile, rival ConocoPhillips rose after the company posted better-thane-expected earnings and lifted its full-year production forecast.
Royal Dutch Shell slumped after the oil company reported a sharp drop in earnings as it suffered from attacks on its operations in Nigeria.
So far, three-quarters of the S&P 500 companies have reported results, with 67 percent of firms topping earnings expectations and 55 percent beating revenue estimates, according to the latest data from Thomson Reuters. If all remaining companies report earnings in line with estimates, earnings will be up 4.2 percent from last year's second quarter.
General Motors and Ford climbed after the U.S. automaker posted July sales that soared, lifted by gains in full-size pickup trucks. And Toyota jumped after the Japanese car maker reported July sales that gained 16.5 percent. The company is also due to post second-quarter earnings results on Friday.
Dell rallied ahead of its shareholder vote on Friday on an offer from CEO and founder Michael Dell to buy the company. Meanwhile, activist investor Carl Icahn filed a lawsuit in new attempt to stop the buyout.
—By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
On Tap This Week:
FRIDAY: Nonfarm payrolls, personal icome & outlays, factory orders, Congress breaks for summer, Dell shareholders mtg, Detroit bankruptcy hearing; Earnings from Chevron, Toyota, Viacom
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