Stocks closed sharply higher on expectations the Fed will ease next week, while strong sales from McDonald's helped to boost the Dow.
"I think what you're seeing is people looking past the Fed's decision," said Doug Altabef, managing director at Matrix Asset Advisors. "They're anticipating some easing and starting to focus on the half-full glass. I think that's good because what you're hearing from some of these earnings reports is that corporate America is fundamentally healthy."
In a speech in Berlin, Federal Reserve Chairman Ben Bernanke said the reasons for a global savings glut are likely to remain in place and he indicated foreign appetite for U.S. debt may wane. However, Bernanke did not address the problems in the credit markets, which have weighed on stocks, nor did he indicate how the FOMC might vote on interest rates when the committee meets September 18.
Investors viewed no news as good news.
"This isn't unusual to see an anticipatory rally up to a Fed meeting," Mike Burnick, director of research at Sovereign Society, told CNBC.com. "A couple of Fed governors in recent speeches have been talking about growth slowing down and that's got investors convinced that we are going to see a rate cut."
Volume was light, but investors remained optimistic with buying across the board in all of the ten S&P 500 sectors. Energy shares charged higher in late-day trading as oil prices moved higher. Telecom and technology were among the largest percentage gainers. Buyers also picked up shares of brokers, retailers and materials companies. McDonald's was one of the biggest percentage winners on the Dow, rising more than 3%, after reporting strong August same-store sales. General Motors also rose more than 3% after labor talks with the auto maker entered the home stretch.
"I think the bulls have firmly gotten control since yesterday afternoon," said Matthew Cheslock, senior specialist at Cohen Specialists. "We're finally focusing on fundamentals. We're seeing McDonald's with some good numbers, GM with some good news and tech stocks have led us higher."
Markets are still divided on the Fed's next move, with some economists predicting no cut while others say a cut of as much as a full point would be needed to help avoid a recession.
"We're looking at the market right now as a buying opportunity," Tim Hartzell, chief investment officer at Kanaly Trust Company, told CNBC.com. "We don't think the Fed decision will end up being that big of a deal. It's all about earnings and the strength of the economy."
Treasury prices fell, sending yields higher.
U.S. stock markets observed moments of silence at various times during the day on the sixth anniversary of the terrorist attacks on the World Trade Center and the Pentagon.
In the oil market, OPEC increased oil production for the first time in two years to ease worries about oil prices ahead of the winter season in the U.S. and Europe. An OPEC delegate said output would be raised by 500,000 barrels a day beginning in November. New York light sweet crude futures rose late in the session to trade above $78 a barrel. Oil traders were anticipating a production increase as high as a million barrels a day.
Shares of Imclone surged after Imclone and Bristol-Myers Squibb said the drug Erbitux improved the survival rate of lung cancer patients in a late-stage study.
The Dow saw some of its gains from a rise in shares of McDonald's after the world's largest fast-food chain reported an 8.1% increase in August sales at restaurants open at least 13 months. The company attributed the increase to new food offerings in the U.S. and strong demand in Japan, Australia and China.
Shares of digital storage company Western Digital rose after the company boosted its revenue outlook after the bell Monday.
There was some positive news on the economic front. Employers were predicting another stable quarter of hiring, with 27% of companies expected to add positions in the last three months of the year, according to a survey by Manpower Inc. of 14,000 companies.
The government said the international trade deficit for July fell slightly to $59.25 billion, roughly in line with expectations.
The CBOE Volatility Index dropped sharply.
European stocks finished higher, while Asian stocks closed mostly higher, except for China, where higher than expected inflation figures knocked the Shanghai Composite Index 4.5% down.