Stocks closed higher as investors were encouraged by healthy merger activity and encouraging news for the worrisome subprime mortgage market.
"While the financial sector is a big concern, with what's going on with the lower tranche debt, the general economic picture looks pretty good because the overall economy is showing strength," said Peter Dunay, investment strategist at Leeb Capital Management.
"There was concern today that there would be selling follow-through but the markets are hoping earnings will propel things higher," he added. "Expectations are still light enough so the market looks like it has potential to move to new highs."
The Dow Jones Industrial Average added about 40 points, or 0.3%, rebounding from Tuesday's 148-point loss. The S&P 500 and the Nasdaq Composite showed similar gains in Wednesday's session.
Gains in the influential financial sector contributed to broad market gains. Investors were encouraged after the head of market regulation at the U.S. Securities and Exchange Commission said two hedge funds operated by Bear Stearns will "be able to unwind in an orderly fashion." The funds have suffered big losses in connection with subprime mortgage loan defaults.
"There was flight to quality yesterday as bonds disconnected because people were uneasy about the subprime things going on," said Adam Tracy, director of listed trading at Thomas Weisel Partners. "There is still prevailing thoughts that there are still other shoes to drop, but there is more belief that it is not going to be an all-out worst-case scenario."
In merger news, shares of Sallie Mae fell 9% after the student loan company said the planned $25 billion takeover by a group of investors may be in jeopardy due to proposed legislation.
Aluminum producer Alcan, which is fending off a hostile $28.8 billion bid from U.S. rival Alcoa, is closer to arranging a friendly deal with Rio Tinto, according to sources familiar with the situation. Canada-based Alcan is expected to make an announcement this week.
Gerdau Ameristeelagreed to acquire Texas-based Chaparral Steel for $4.22 billion, sending shares of the latter up 10%.
New York light sweet crude futures traded slightly lower, its second decline in the last three sessions.
On the economic front, Federal Reserve Governor Kevin Warsh spoke at the U.S. House of Representatives on the risks to the economy of hedge funds, while Philadelphia Fed President Charles Plosser said the U.S. economy and financial system are in fine shape despite troubles in the housing market and subprime lending sector.
Treasury prices fell, sending the yield on the benchmark 10-year note back above 5.1%.
The dollar continued its recent slide, hitting a record low against the euro for the second straight day.
European Stocks Lower
European stocks ended down on Wednesday as concerns regarding the U.S. subprime mortgage market continued to drag global indexes lower.
The London FTSE-100, Paris CAC-40 and Frankfurt DAX were all lower.
In corporate news, positive earnings from the London Stock Exchange and Burberry's did little to lift the overall market.
Shares of the LSE retraced early gains to trade flat as the U.K. exchange posted a 19% rise in quarterly revenue compared to the same period last year, due to record trading volumes.
And Burberry's stock fell 1.3% even though the British fashion house beat analysts' forecasts with a 30% jump in first-quarter sales based on constant exchange rates.
Asian Stocks Mostly Lower
Tokyo's Nikkei 225 Average shed 1.11% to its lowest finish in nearly two weeks, hurt by a tumble in U.S. stocks and a stronger yen.
Investors sold a wide range of stocks including high-tech exporters such as Sony that had led the market's recent rally. Shares of Millea Holdings and other insurers also declined on concerns that a fall in bond yields would hurt income from investments in government bonds.
South Korea's KOSPI index hit record highs in intraday trading but ended lower as LG.Philips LCD declined on concerns a key shareholder will soon sell its stake.
China's Shanghai Composite Index seesawed between negative and positive territory as investors worried that imminent initial public offerings would swamp the market with fresh supply, while real estate stocks and large banks cushioned the fall.
Hong Kong stocks fell as much as 1%, as weakness on Wall Street prompted investors to take profit in Hong Kong Exchanges and other recent gainers. Global lender HSBC Holdings slid on forecasts predicting more mortgage defaults in the troubled U.S. subprime home loan market serving high risk borrowers.