Stocks traded off the highs of the day, but remained significantly up, as the Federal Reserve reported improving economic conditions across the country, and as upbeat earnings outlooks for banks lifted investor sentiment.
The Dow Jones Industrial Average rose more than 70 points a day after the major indexes closed higher as earnings season got off to a strong start. The Dow was up more than 100 points earlier.
Most blue-chip components advanced, led by JPMorgan, Bank of America and Boeing. Alcoa and Walt Disney slipped.
The S&P 500 and the Nasdaq also rose. The CBOE Volatility Index, widely considered the best gauge of fear in the market, fell below 17.
All key S&P sectors gained, led by financials, energy and materials.
The Federal Reserve's monthly "beige book" release of economic conditions across the country showed the nation's economy strengthened at the end of the year.
The survey did, however, note that the housing market remains troubled, as prices continue to fall and millions of homes remain in foreclsoure.
A successful bond auction in Portugal, and positive earnings outlooks for banks published in several brokerage firm reports, served as catalysts to push stocks higher on Wednesday in the early stages of what many investors expect will be an upbeat earnings season.
The euro rose against the dollaron news of the Portugese bond offering, while the U.S. currency fell against a basket of currencies as well. Gold, meanwhile, gained to close at $1,385.70 an ounce, after initially slipping in the wake of the Portugese bond auction.
The positive tone to the stock market comes as investors realize corporations are well positioned to take advantage of a strengthening economy, said Marc Pado, market strategist at Cantor Fitzgerald.
In the fourth quarter, corporations kept costs low and inventories down as sales rose, Pado said. "There’s the potential for some positive surprises for the fourth quarter, and the prospects for the first quarter are good," Pado said.
"Ultimately we’ll see better jobs data," he added. "As long as that’s the case it’s really hard for bears to get the upper hand here."
Banks rose ahead of major earnings releases, beginning with JPMorgan's on Friday. That bank's stock also got a boost after CEO Jamie Dimon told CNBC JPMorgan is ready to pay an annual dividend of 75 cents to a dollar after it receives approval by the Federal Reserve, which will be conducting stress tests on the largest U.S. banks.
Banks also benefited from Wells Fargo's upgrade of the sector to "overweight" from "market weight." The bank cited the sector's "superior" earnings-per-share growth to the S&P 500.
"We believe continued credit improvement, a return to positive loan growth, and a constructive investment banking outlook will drive average EPS growth of 59% in 2011, well above the 12% expected for the S&P 500," Wells Fargo wrote in a report to clients.
The brokerage also said it expects banks to double their dividend payout ratios to about 30 percent, and said its "top ideas" in the banking sector are: Bank of America, PNC , Comerica , JPMorgan and Goldman Sachs .
Meanwhile, JPMorgan downgraded Goldman Sachsto "neutral" from "overweight" for 2011, citing valuation. Overall, JPMorgan favors European investment banks over U.S. banks, noting that the U.S. banks have outperformed their European peers by 16 percent since the brokerage cited its preference for US investment banks in July 2010.
UBS and Credit Suisse were named JPMorgan's top picks.
Elsewhere in corporate news, ITT soared Wednesday after its board of directors approved a plan to split the diversified manufacturer into three publicly traded companies, separating its defense and information business, its water technology unit and its industrial products business. The split will happen before the end of the year, ITT said.
American International Group accepted a $2.16 billion offer for its Taiwan Nan Shan Life unit. The offer was from a consortium led by local conglomerate Ruentex Group.
General Electric traded flat to slightly lower after Bernstein downgraded the diversified manufacturer (and parent of CNBC) to "market perform," saying GE was approaching fair value. But Credit Suisse confirmed its "outperform" rating for the company on Wednesday, saying GE would continue to trade higher, citing strength in GE's power equipment business.
Intel gained ahead of its earnings release, scheduled for Thursday. Deutsche Bank, meanwhile, lowered its rating on the semiconductor sector to "equalweight," although it continues to like Intel, as well as Marvell .
Among retail stocks, Lululemon Athletica soared as the maker of yoga clothes upped its fourth-quarter outlook as it expected stronger revenue results. (Read more: Lululemon: Not a Downward Dog.)
Meanwhile, AnnTaylor Stores rebounded after sliding along with Talbot's on Tuesday.
And Zale skyrocked after the troubled jewelry retailer reporting an 8.5 percent rise in same-store sales in the final two months of 2010.
Most steel stocks gained after UBS raised its targets for several companies, although AK Steel skidded after the brokerage reduced its rating on the stock to "sell" from "neutral." UBS raises U.S. Steel's price target to $57 a share from $49, Reliance Steel's price target to $62 from $55, and Nucor's target to $43.5 a share from $37.
Alcoa, meanwhile, struggled after RBC cut its rating on the aluminum producer to "underperform" from "sector perform."
BB&T raised its earnings per share estimates for Dole , Fresh Del Monte and Chiquita Brands after weather problems in banana-growing regions depressed supplies of the fruit producing companies. Shares of all three companies advanced.
Oil pricesadded to recent gains to close at $91.86 a barrel after the government said crude oil stocks fell more than expected last week.
Meanwhile, the Trans-Alaska Oil Pipeline was allowed to resume limited operations after a leak that cut U.S. oil supplies by 12 percent.
Investors flocked to an auctionof 10-year Treasury notes at a high yield of 3.39, and at a bid-to-cover ratio of 3.30. But the 10-year closed down 2/32 to yield 3.35 percent.
On the U.S. economic front, import prices rose 1.1 percenton a 3.9 percent surge in energy costs, after a revised 1.5 percent increase in November, the Labor Department reported. Prices rose 4.8 percent for all of 2010.
Applications for U.S. home mortgages rose 2.2 percent for the week ended Jan. 7, to the highest level in a month, as rates edged lower, the Mortgage Bankers Association reported Wednesday.
And the Bank of China confirmed that it would offer yuan trading to its U.S. customers.
European shares closed higher across the board after Portugal was able to sell debtat the top end of its range, resulting in a drop in 10-year note yields, although four-year yields rose slightly in the offering. The FTSEurofirst300 Index ended up 1.4 percent.
On Tap This Week:
THURSDAY: Bank of England and European Central Bank announcements, international trade, PPI, jobless claims, 30-year Treasury bond auction; after-the-bell earnings from Intel.
FRIDAY: CPI, retail sales, industrial production, consumer sentiment, business inventories, Richmond Fed president speaks; before-the-bell earnings from JPMorgan.
More From CNBC.com: