Stocks closed higher, helped by buying in the financials sector, as bargain hunters shrugged off lingering concerns about corporate financing.
"The question many investors should ask themselves these days is whether deals are merely being re-priced, which seems appropriate, or will be cancelled," said Jason Trennert, chief investment strategist at Strategas Research Partners. "Valuation counts, and there is little evidence thus far that the problems in the subprime market will lead to systemic problems in the economy at large."
All of the ten S&P 500 sectors were trading higher, with materials leading the way. However, a reversal in the influential financials sector was credited with turning stocks around. Buying in technology helped to lift the Nasdaq.
Despite today's rally, some investors were reluctant to say stocks have seen a bottom.
"We're seeing a little bit of a recovery, but not enough to convince me the decline is through," Kevin Kerr, senior analyst with Resource Trader Alert, told CNBC.com. "I still see more downside potential."
"I'd say we've hit a short-term peak," said Vince Farrell, managing director at Scotsman Capital Management. "I don't think we'll go back to a new high this year only because it's going to take a while to find out exactly what the damage to the credit markets is."
The session got off to a volatile start, with stocks trading back and forth, as traders remained nervous about tightening in the credit markets.
"It's kind of a tug of war between weaknesses in the U.S. and strength overseas," Martin Weiss, senior editor of Money & Markets, told CNBC.com. "The U.S. is being pulled down by the credit issues, while foreign markets are being pushed up by continuing economic growth."
Last week was the worst week in five years for the Dow and the S&P 500 indexes. Stocks tumbled on concerns about a tighter lending environment.
Some investors saw the recent dip as a buying opportunity.
"What's going on is not a real big surprise," said Mike Williams, global strategist at BeamReach Trust. "Emotion is high and this is where you make your money. Every time people panic, it's turned out to be wrong over the long term."
As investors bought stock, they bailed out of U.S. Treasury bonds. Treasury prices fell, sending the yield on the benchmark 10-year note back up to 4.8%.
Wall Street also reacted to more earnings news.
Dow component Verizon Communications said its second-quarter profit rose, helped by growth in wireless and high-speed Internet subscribers. The No. 2 U.S. phone company said net profit rose to 58 cents a share, in line with expectations.
HSBC Holdings, Europe's biggest bank, posted higher first-half profit and struck an upbeat tone on the global economy on Monday, despite a big rise in bad debts linked to its problems in the U.S. housing market. HSBC said pretax profit rose 13% to $14.16 billion in the six months to June 30, boosted by strong growth in Hong Kong, the Asia-Pacific and its investment banking arm. That was higher than Wall Street expectations.
Health benefits provider Humana said its second-quarter profit more than doubled year-over-year. Humana said net income rose to $1.28 a share, better than the $1.17 that analysts were expecting. Shares of Humana rose.
Shares of Dow Jonesfell after a report that News Corp.'s Rupert Murdock is unlikely to proceed with a bid to take over the publisher of The Wall Street Journal at the current vote count. Members of the Bancroft family, which holds a controlling stake in the company, were expected to announce their decision on the bid today.
Shares of American Home Mortgage plunged after the mortgage lender suspended its dividend and said some of its financial backers want their money back.
U.S. industrial conglomerate Ingersoll-Rand accepted an offer from Doosan Infracore to buy its Bobcat machinery business, along with two other units, for $4.9 billion in cash.
Employment agency Monster Worldwide reported lower-than-expected quarterly earnings and announced a restructuring plan that includes cutting 800 jobs, or 15% of its full-time staff.
New York light crude futures fell in a choppy session to trade under $77 a barrel.
European Stocks Finish Mixed
European stocks turned in a lackluster close, following sharp losses in Friday's U.S. session.
The London FTSE-100 closed modestly lower, while the Paris CAC-40 and the Frankfurt DAX finished slightly higher.
Shares in Barclays fell after ABN Amrowithdrew its recommendation for an $89.55 billion from the U.K. bank. The move could boost a rival bid from a Royal Bank of Scotland-led consortium.
"The latest announcement is quite positive because (ABN) were very focused on the Barclays bid," Carlo Ponfoort, Analyst at AEK, told "Squawk Box Europe," ABN has responsibility to its shareholders to get the highest bid."
Also on the M&A front, shares in British paint-maker ICI soared 6.6% after it rejected a sweetened $15.9 billion offer from its Dutch rival Akzo Nobel, claiming the deal still undervalued the company. Shares of Akzo gained.
On the earnings front HSBC beat analysts' expectations with a 13% rise in first-half profit, despite a rise in bad debts from the slowing U.S. housing market. Shares of HSBC rose on the news.
Meanwhile, Spain's Telefonica beat expectations with a 66% rise in first-half net profit, industrial-gases-producer Linde posted a 16% gain in second-quarter revenue and book and newspaper publisher Pearson posted a sharp rise in first-half profit.
Asia Mostly Higher
Asian stocks were mostly higher in the afternoon session Monday with markets reversing earlier losses to close in positive territory. Japan finished flat with South Korea gaining over 1%.
Investors fear losses in the subprime sector may spill over into the broader U.S. economy, Asia's top export market, and increasing deterioration in credit markets would hurt chances for more corporate buyouts and dry up funding.
Tokyo's Nikkei 225 Average closed almost flat after hitting its lowest in nearly four months as a stronger yen weighed on Canon and other exporters, but the market largely brushed aside the defeat of Prime Minister Shinzo Abe's ruling coalition in Sunday's upper house elections.
South Korea's KOSPI rebounded from a sharp two-day drop as technology firms such as Samsung Electronics advanced on their second-half outlook, with gains also underpinned by stronger-than-expected industrial output data. The KOSPI has lost 6% in the past two trading days, including a 4% drop last Friday alone.
Australia's S&P/ASX 200 Index finished higher, recovering from two straight sessions of
declines as mining firms rebounded and as investors focused on strong economic fundamentals.
Hong Kong blue chips were flat with China Life's upbeat profit guidance providing support. China plays declined, as investors shed PetroChina after the Hong Kong stock exchange said Warren Buffet had reduced his stake in the oil producer.
China's Shanghai Composite Index surged as much as 2% to a fresh record high, as investors bought heavily into steel and real-estate companies with strong interim earnings prospects.