Stocks soared Tuesday, led by financials, as the market breathed a huge sigh of relief following better-than-expected earnings from Goldman Sachs and Lehman Brothers.
The Dow Jones Industrial Average held a gain of more than 200 points throughout the day, with all 30 components higher. Advancers were beating decliners 9 to 1. It was highly unusual trading for a Federal Reserve meeting day. Typically, stocks idle for most of the day until the central bank issues its decision.
"I think what's really happening today is that people are really pleased and relieved with Lehman Brothers and Goldman Sachs earnings," said Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati.
If the CEO of Lehman had said "we're not having liquidity problems," the market wouldn't have been comforted. Instead, it delivered "good, hard facts that the company is indeed solvent and liquidity isn't an issue the way it was with Bear Stearns," Detrick explained.
The market started off optimistic amid relief that the fire sale of Bear Stearns to JP Morgan for $2 a share didn't cause a huge selloff in the previous session. Then, earnings from the investment-banking sector came in better than expected Tuesday, giving stocks a much-needed shot in the arm.
Of course, all of this could change, depending on what the Fed does when it issues its decision on interest rates this afternoon.
Investors are anticipating an unusually large interest-rate cut from the Federal Reserve when the central bank issues its decision, expected at 2:15 p.m. ET today. Expectations for a full percentage-point cut -- to 2 percent from 3 percent in the federal-funds rate target -- were at about 84 percent, according to fed-funds futures, down from 100 percent late Monday.
"As long as the Fed doesn't rock the boat, we should be OK," Detrick said. "Only a rate cut of 50 basis points could really scare the market." More importantly, Detrick said, will be what the Fed says in the statement accompanying its decision. "We just want to know that the Fed is willing to cut rates down the road if necessary."
Financials were the biggest gainers among 10 key S&P sector indexes, jumping about 4 percent, after shedding 33 percent of its value since the start of the year.
Goldman Sachs, the largest U.S. investment bank by profits, reported its earnings were cut in half, but topped estimates. Net income fell to $1.51 billion, or $3.23 a share, from $3.2 billion, or $6.67 a share, a year earlier, as the investment bank logged steep losses on corporate loans and other assets.
Lehman Brothers, which has been the center of speculation that it might be the next domino to fall in the credit crunch, reported its earnings plunged, but beat expectations. Net income fell to $489 million, or 81 cents a share, from $1.15 billion, or $1.96 a share, a year earlier. Lehman, which was long seen as a bond house but is now more diversified, cited lower bond-trading revenue for the sharp drop. Its shares rebounded, recovering the 19 percent it lost in the previous session and then some.
Bear Stearns shares rocketed 50 percent after a sell-off Monday triggered by JP Morgan's Fed-backed offer to buy the No. 5 investment bank for the fire-sale price of $2 a share.
It was a day of rebounds in the financial sector. Among other notable names that recovered following Monday's pounding are: National City , MF Global and Swiss bank UBS . UBS, like Lehman Brothers, has also been rumored as potential casualty of the credit crunch.
Fannie Mae and Freddie Mac also bounced back, with both stocks gaining more than 12 percent, amid expectations that restrictions on the government-backed mortgage-finance companies will be loosened, helping them pump more money into the housing market.
Homebuilders also got off to a strong start after Hovnanian Enterprises CEO Ara Hovnanian expressed optimism that the industry was ready to recover on CNBC's "Squawk Box." Hovnanian called on the Fed and Congress for aggressive action.
"They need to bring stability, whether it's through getting more availability of mortgages or whether it's bringing a tax credit into play so consumers can afford to buy a home or feel good about buying a home," Hovnanian said.
Tech stocks advanced, with 90 percent of the Nasdaq 100 moving higher, after some optimistic outlooks from a few big tech names.
Yahoo rose after the Internet giant said it's positioned for "accelerated growth" in the next three years and expects to stay ahead of analysts' forecasts. The company reiterated that Microsoft's roughly $44 billion bid, which works out to $31 a share, undervalues the company.
Dell gained after founder Michael Dell said he expects the company's growth rate to exceed the rest of the industry, helped by strong growth in Asia.
"We expect to continue to grow faster than the industry, particularly in Asia," Michael Dell told a news conference during a visit to South Korea to meet clients and suppliers.
In economic news, wholesale prices rose 0.3 percent, as expected. Excluding volatile food and energy costs, core producer prices increased 0.5 percent. U.S. homebuilding projects started in February fell by 0.6 percent to a higher-than-expected annual rate of 1.065 million units. Building permits, an indicator of future building activity, dropped 7.8 percent.
This Week:
TUESDAY: Fed meeting
WEDNESDAY: Morgan Stanley earnings; Visa IPO; Crude inventories; New York Auto Show
THURSDAY: Weekly jobless claims; Philly Fed report; FedEx earnings; Bond market closes early
FRIDAY: Financial markets closed for Good Friday holiday
Send comments to cindy.perman@nbcuni.com.