"The economy is still up in the air because so much of it depends on people having paychecks," said Kim Caughey, equity research analyst at Fort Pitt Capital Group.
Markets opened strongly but began a downward trek on talk of possible lowered guidance from Europe's ING and Fortis, sending JP Morgan and other financials down.
Financials were under additional pressure on a Reuters report that Goldman Sachs planned to cut 5 percent of its global workforce this year. The investment banking giant played down the report, telling CNBC it sheds that amount of its workforce every year based on performance reviews. But Goldman's stock slid anyway.
Microsoft, Caterpillar and Honeywell all gained on positive earnings reports and injected the market with some confidence that the worst of the stock slump may be over.
Microsoft released earnings after the bell Thursday and beat estimates, with shares rising on massive volume. Also, Caterpillarbeat Street expectationsand said foreign sales would help it overcome weakness in the US economy.
And Honeywell said its quarterly earnings were in linewith analysts' estimates, but their sales slightly exceeded expectations. The diversified manufacturer also forecast that profits in the first quarter would rise 21 percent to 26 percent, pushing shares well higher.
Analysts saw the strong earnings as underscoring the position that fear is driving the market more than fundamentals and Wall Street is poised for a recovery.
"The market right now is being driven by emotion, but when you take a look at the landscape of lower interest rates, financials and real estate trusts do well in this type of environment," Baum said. "These things have just gotten clobbered and there's no reason for it."
Meanwhile, under a stimulus package announced Thursday, most tax filers will get refunds of $600 to $1,200, and more if they have children. The package was hailed by investors and business leaders, along with the Fed rate cuts.
Google Gains; Upgrades Move Stocks
Google, whose shares have tumbled 19 percent in the past month, was up as the firm nears a $3.1 billion takeover of ad firm DoubleClick. The deal has run into opposition from competitors who worry it will make online advertising more expensive.
Apple , though, continued to fade as the stock has tumbled by more than a third in the past month.
Shares of bond insurer Ambac also jumped on news that investor Wilbur Ross is in serious talks to buy the company. The stock has been on a roller coaster this week, initially gaining as talks of a bailout for the industry took hold Wednesday, then tumbling nearly 24 percent Thursday after a New York official warned that the move was far from certain.
Halliburton was among stocks posting big early gains after Morgan Stanley upgraded the oilfield services company from "equal-weight" to "overweight."
Compuware also gained sharply on an upgrade, after Piper Jaffray raised its rating on the stock to "buy" from "neutral," and the company reiterated its 2008 earnings forecast.
Dow component leaders besides Honeywell, Microsoft and Caterpillar include General Motors and Alcoa, while Coca-Cola led the laggards.
Tempur-Pedic matress maker was among the biggest losers in the broader market, with shares tumbling as much as 25 percent on weak fourth-quarter earnings.
In other markets, Treasuryswere up as stocks lagged, while oil gained but was well off its highs for the day.