Treasury Secretary Timothy Geithner convinced Wall Street to give banks another chance Tuesday.
Geithner's assertion that "the vast majority" of banks have enough capital pulled stocks from a slump that began with a sell-off Monday and spilled over into Tuesday morning. Geithner also told a congressional oversight committee that some banks would be allowed to repay financial bailout funds with the blessing of bank regulators.
The comments signaled that banks might not get poor marks in government "stress tests" designed to determine whether banks have enough capital to survive if the economy turns even worse. The results are due May 4.
"There is the hope that everything will be well after the stress test," said John Nichol, senior portfolio manager at Federated Investors.
The Dow Jones industrial average jumped 128 points after tumbling 290 points Monday on worries about bad debt at banks and the implications of the stress tests. The drop punctuated a six-week rally that lifted stocks more than 20 percent from their lowest levels in more than a decade.
Stocks fluctuated in the early going Tuesday after a string of lackluster earnings reports and forecasts stoked worries about how quickly the economy can recover.
Bank stocks, which led the market lower Monday, bounced back after the Geithner comments. JPMorgan Chase & Co. rose 9.6 percent, Citigroup Inc. jumped 10.2 percent, while Goldman Sachs Group Inc. rose 4.7 percent.
The fortunes of bank shares have largely dictated the stock market's direction since the fall of Lehman Brothers Holdings Inc. in mid-September, and investors took Geithner's comments as a reason to go back into the market. Some analysts attributed the buying to short covering, where investors have to buy stock after having earlier sold borrowed shares in a bet that the market would fall.
The Dow rose 127.83, or 1.6 percent, to 7,969.56.
Broader stock indicators showed the biggest gains. The Standard & Poor's 500 index rose 17.69, or 2.1 percent, to 850.08, and the Nasdaq composite index rose 35.64, or 2.2 percent, to 1,643.85.
Huntington Bancshares Inc. logged one of the more notable turnarounds. The regional bank fell as much as 26 percent in early trading before ending up 34 cents, or 10.9 percent, at $3.45.
The jump in most banks overshadowed mixed results from big-name companies. Coca-Cola Co. and drugmaker Merck & Co. posted results or issued forecasts that fell short of what the market expected. Wall Street was uneasy about some of the reports because analysts had set low expectations after a bruising January in which fourth-quarter results short-circuited a stock rally.
Coca-Cola fell $1.24, or 2.8 percent, to $43.09, after its first-quarter earnings fell 10 percent because of restructuring charges and write-downs. The beverage maker's earnings were in line with Wall Street's expectations but sales fell short.
Merck reported a 57 percent drop in first-quarter earnings because of a slide in both sales of its drugs and income from its partnership on cholesterol medicines. Merck fell $1.68, or 6.7 percent, to $23.54.
Investors moved into shares of Caterpillar Inc., DuPont and United Technologies Corp. after their reports.
Construction equipment maker Caterpillar posted better-than-expected earnings but reduced its forecast. Caterpillar rose 91 cents, or 3 percent, to $31.39.
DuPont said its first-quarter profit dropped on falling demand. The chemical company also cut its full-year forecast and said it will increase its efforts to cut fixed costs. DuPont rose $1.32, or 4.9 percent, to $28.06.
United Technologies rose $2.18, or 4.8 percent, to $47.99 after the parent of Otis elevators and Sikorsky Aircraft posted results that were in line with expectations and reiterated its full-year forecasts.
Among banks, JPMorgan rose $2.84, or 9.6 percent, to $32.53, while Citigroup rose 30 cents, or 10.2 percent, to $3.24. Goldman Sachs rose $5.35, or 4.7 percent, to $120.36. Morgan Stanley rose $1.13, or 4.8 percent, to $24.65.
In other market moves, the Russell 2000 index of smaller companies rose 17.56, or 3.9 percent, to 470.05.
About four stocks rose for every one that fell on the New York Stock Exchange, where volume came to 1.7 billion shares.
Bond prices fell. That pushed up the yield on the benchmark 10-year Treasury note to 2.90 percent from 2.84 percent late Monday. The yield on the three-month T-bill rose to 0.15 percent from 0.12 percent Monday.
Crude for July delivery rose 4 cents to settle $48.55 a barrel on the New York Mercantile Exchange.
The dollar was mixed against other major currencies while gold prices fell.
Overseas, Britain's FTSE 100 slipped 0.1 percent, Germany's DAX index rose 0.3 percent, and France's CAC-40 rose 0.2 percent. Japan's Nikkei stock average fell 2.4 percent.