The Dow climbed to a new record and the Nasdaq finished at a 6-year high on a buying binge in technolgy and stocks that benefit from falling oil prices.
Microsoft and Google both moved higher, pushing the Nasdaq to its highest close since February 2001.
"Energy continues to weaken which should help profits in non-petroleum companies and that lowers the fear of the Fed hiking rates because of higher energy prices," said Peter Kenny, Managing Director of Knight Equity Markets.
Oil closed 4% lower, and is down 15% since Jan. 1. Stocks got an early lift as a multi-day sell off in emerging markets and commodities-based stocks abated.
"Certain sectors of the market were poised to do well, housing may have found a bottom and financial services stocks look like they're going to have a good year," Kenny told CNBC.com.
Consumer stocks also moved higher. Dow components Altria and Procter & Gambleclosed at all time highs. Twelve percent of the S&P 500 were at 52 week highs or above. The Dow last set a record Dec. 27.
The upcoming earnings season was also a focus, with good results coming this week from Genentech and Alcoa.
However, Software maker SAP took some steam out of the market's final half hour after it warned software sales would fall below Wall Street's forecast.
"The consensus is that corporate earnings are slowing and the market is saying 'baloney,'" said Hugh Johnson, Chief Investment Officer at Johnson Illington Advisors.
"The theme that has driven the market is that the decline in oil will more than offset the drag in bad news in housing and improvement in the trade balance is icing on the cake," Johnson told cnbc.com.
Oil prices fluctuated for most of the day but selling accelerated ahead of the 2:30 p.m. NYMEX close. New York light crude futures dropped below $52 a barrel, reversing an early buying trend in energy stocks.
Shares of Dow component Exxon Mobil came off earlier highs. Valero Energy was slightly higher. It was upgraded by Bernstein to a market perform from underperform.
Airlines were big winners again with several carriers hitting multi-year highs on takeover chatter and the prospects of lower fuel costs. Continental hit a 5-year high. United Airlines and AMR , the parent company of American Airlines, also traded higher.
Cisco Systems said it will sue Apple in a trademark dispute over the new iPhone. Cisco Systems reached a six year high.
Reports of a possible battle heating up for real estate trust Equity Office Properties moved that stock higher as well as the stocks of other REITs. Cerberus Capital Management is reportedly preparing a $20 billion bid for Equity Office, which had agreed to be acquired by Blackstone Group for $16 billion.
"If Equity Office does go private, there's a lot of money - that's $7 billion - that needs to get reinvested in the rest of the REIT stocks," Louis Taylor, Senior REIT Analyst at Deutsche Bank Securities told CNBC. "That's more than all of the money that came into real estate mutual funds in 2006."
REIT indexes gained about 35% in 2006 and shares of REITs were winners today including Simon Property Group and Equity Residential.
U.S. jobless claims dropped last week by 26,000 to 299,000, the lowest level in almost six months. The drop was much sharper than economists had expected and the data suggested the slowing economy has not yet adversely affected the broader labor market.
Treasury bonds sold off on the labor news, sending yields higher.
Europe Closes Sharply Higher
European shares closed near six-year highs bolstered by gains in mining stocks and the rally in the U.S.
The Bank of England surprised investors with an unexpected rate hike of 25 basis points. Stocks in London pulled back from earlier gains, weighed down by the banking sector. London's FTSE-100 closed higher after taking a temporary dive on the rate hike news.
The European Central Bank left its key rate unchanged and that helped stocks in Germany and Paris.
Frankfurt's DAX and the Paris CAC-40 both finished higher.