"[The jobless claims report] continues with the positive greeting we received on Friday and it's going to remove the conspiracy theories and uncertainties, " said Todd Schoenberger, managing principal at The BlackBay Group. "What's great is that even if the data's volatile, it's good for stocks and it shows that this positive employment data has some traction."
Adding fuel to the rally, Citigroup boosted its rating on U.S. equities to "overweight."
"The combination of even easier central bank policy and cheap valuation should ensure global markets rally a further 9 percent to the end of 2013, " Citi wrote in its research note.
Apple fell near correction territory again after a federal appeals court reversed an injunction that barred rival Samsung from selling its Galaxy Nexus smartphone.
Sprint surged nearly 15 percent after the telecom company confirmed that it is in talks with Japan's Softbank. Softbank is looking to acquire a majority stake in Sprint in a deal worth nearly $12.8 billion . Rivals Verizon and AT&T edged lower.
Caterpillar bobbed in and out of negative territory after RBC Capital downgraded the company to "sector perform" from "outperform, " citing headwinds including elevated inventories both for Caterpillar and the overall earth-moving equipment industry, in addition to weakness in Europe and China.
Stock photography agency Shutterstock and real estate services provider Realogy both surged in their market debut on the NYSE.
Financial giants JPMorgan and Wells Fargo are scheduled to post earnings on Friday.
IMF head Christine Lagarde said Greece should be allowed extra time to meet its budget goals.
Standard & Poor's downgraded the country's debt rating to one notch above junk grade and put the country on negative outlook. The Spanish IBEX initially fell, but rebounded to finish higher. Market participants hope the agency's move will push Madrid to request a formal bailout. European shares ended higher.
Meanwhile, central banks in Brazil and South Korea cut rates by a quarter percentage point.
On the economic front, U.S. trade deficit increased to $44.2 billion in August, mostly in line with analyst expectations, according to the Commerce Department. Overall exports dropped amid European concerns, while imports slipped slightly.
Treasury prices remained weak after the Treasury Department auctioned $13 billion of 30-year bonds at a high yield of 2.904 percent and bid-to-cover, an indicator of demand, was 2.49.
— By CNBC's JeeYeon Park (Follow JeeYeon on Twitter: @JeeYeonParkCNBC)
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FRIDAY: PPI, consumer sentiment, GM resumes Volt production; Earnings from JPMorgan, Wells Fargo
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