Stocks closed higher across the board as investors were encouraged by better-than-expected housing data and a steep pullback in crude oil prices.
"I think the market was pleasantly surprised by the housing numbers," said John Massey, portfolio manager at AIG SunAmerica Asset Management, in an interview with CNBC.com. "That took out a significant amount of resistance and hesitation in the market, and tensions cooling in Iran led to a pullback in energy. It was a confluence of those two events."
"They loved the home sales number because it helps the housing debacle," said Tom Schrader, head of listed trading at Stifel Nicolaus, in an interview with CNBC.com. "It was a combination of that and oil prices coming down."
The benchmark Dow Jones Industrial Average vaulted to triple-digit gains after a week of sideways trading as buyers stepped in ahead of the start of quarterly earnings season next week.
Barry Hyman, equity market strategist at EKN Financial Services, told CNBC.com that there was "a little bit of excitement back in the air" with Tuesday's advance.
"We are looking at the first significant drop in energy since the Iran crisis started," Hyman said. "We are also seeing some excitement before earnings season. There seems to be very low expectations for this quarter, so there's the possibility earnings could actually beat estimates again."
All ten S&P 500 sectors traded higher. Stocks were led higher by the consumer discretionary sector as well as financial stocks, which have become increasingly sensitive to housing news.
Basic materials, health care and technology also saw gains of more than 1% on Tuesday. The utilities sector lagged the broader markets as investors booked profits in the group, which remain's the top-performing sector year to date.
"I think the single biggest factor is crude being down on speculation the Iran situation with the British sailors will end without a trial," Michael Driscoll, senior managing director of equity trading for Bear Stearns, told CNBC.com. "I think that's going a long way toward improving the mood."
But Driscoll warned against investors becoming overly optimistic this week. "I would caution everyone on getting too excited," he said. "It's a big holiday week and volume is subdued."
New York light crude futures closed down 2% a barrel, the largest decline in a month, as hopes grew for a diplomatic resolution to the standoff between Iran and Britain.
"We have today energy prices moderating somewhat and if the economy moderates, that should allow us to have inflation cool down to around the 2% level going forward," Joseph Stocke, chief investment officer at StoneRidge Investment Partners, told CNBC.
The drop in oil sparked rallies in consumer discretionary stocks such as home improvement retailer Home Depot , which was the biggest gaining stock among the 30 components in the Dow Jones Industrial Average.
Other stocks lifting the Dow included Altria , the parent company of cigarette maker Philip Morris, and aerospace giant Boeing . Altria shares rose for the second straight day after the company completed the long-awaited spinoff of Kraft Foods while Boeing gained on continued troubles at rival Airbus.
Shares of Google advanced after the Internet search portal said it will enter the TV advertising business, forging a deal with satellite TV operator EchoStar Communications.
Pending home sales unexpectedly rose in February, the National Association of Realtors said this morning, easing concerns of a spillover from the troubled subprime mortgage market.
Shares of Accredited Home Lenders rose sharply, a day after the subprime mortgage lender said it had secured a loan from a hedge fund.
Big Three automakers Ford , General Motors and DaimlerChrysler reported March sales figures today.
Shares of Jackson Hewitt fell on news the Justice Department was attempting to shut down franchises in several states due to alleged tax fraud violations.
Treasury prices were higher, sending yields lower.
Broad Rallies Across Europe, Asia
European stocks finished higher following strong rallies in Asia as the London FTSE-100 and the Paris CAC-40 posted strong gains, while the Frankfurt DAX closed above 7,000, the highest level for Germany's benchmark index since November 2000.
E.ON gained after the German energy giant abandoned an attempt to buy Spain's Endesa on its own, announcing a a deal with Enel SpA and Acciona SA to divide up Spain's biggest utility company.
British insurer Resolution posted an 18% rise in its embedded value at the end of 2006, beating market expectations.
Tokyo's Nikkei 225 Average closed 1.3% higher as investors returned to shares of Advantest, Honda Motor and other stocks hit in the previous session's selloff.
South Korea's Kospi Index reversed earlier losses to finish at its highest close in five weeks as chipmakers gained on hopes computer memory chip prices may soon bottom, while Hyundai Heavy hit a record as the shipbuilder continues to rack up orders.
Hong Kong stocks hit fresh five-week highs, re-testing the key 20,000 level as gains on Wall Street prompted buying in China Mobile and other heavyweights, while mainland stocks also rallied as China's Shanghai Composite Index closed at yet another record high.