The Dow is ending up 235.44, or 2.9 percent, to 8,504.08. It is the biggest point gain for the Dow in over a month.
Reassuring news about housing and banking on Monday convinced investors to return to the stock market.
The Dow Jones industrial average shot up 235 points, its biggest daily point gain in over a month, and made up three-quarters of last week's losses. All the major indexes rose about 3 percent.
A better-than-expected profit report from Lowe's Cos., an uptick in homebuilder sentiment and positive comments from analysts about U.S. banks revived investors' confidence in an economic rebound. Stocks fell sharply last week on worries that a recovery might be further off than hoped, interrupting a rally that has left the Standard & Poor's 500 index up 34.5 percent since March 9.
Steep drops in home values have been at the heart of the economy's troubles, slicing into consumers' wealth and saddling banks with huge losses. Analysts believe that stability in the housing and banking industries are imperative for the economy to rebound.
"There's a realization that things are going to get better," said James Cox, managing partner at Harris Financial Group. "That's the main theme of the market over the last couple of weeks."
Despite Monday's bounce, however, the market is expected to remain volatile as investors look for signs that the economy is actually recovering — not just slowing its descent.
At the start of the market's upswing in March, signs of stabilization were enough to encourage investors to buy stocks. Linda Duessel, equity market strategist at Federated Investors, said the rally has been driven by "less bad" information.
"Probably, we'll get bored with that as the months progress," Duessel said. "We'll need something better to move the market."
According to preliminary calculations, the Dow rose 235.44, or 2.9 percent, to 8,504.08. That was the biggest point gain since a 246-point jump on April 9.
The S&P 500 index rose 26.83, or 3 percent, to 909.71, and the Nasdaq composite index rose 52.22, or 3.1 percent, to 1,732.36.
Government bond prices fell, pushing the yield on the 10-year Treasury note — a widely used benchmark for home mortgages and other loans — up to 3.22 percent from 3.14 percent late Friday.
Last week, the Dow slid 3.6 percent, the S&P 500 index lost 5 percent and the Nasdaq fell 3.4 percent as a weak retail sales report and an uptick in job losses had investors questioning the merits of a two-month rally off of 12-year lows.
But U.S. and European trading started on strong footing Monday after India's stock market surged an unprecedented 17 percent. Investors viewed the country's election results as paving the way for economic reforms.
U.S. stocks got a boost when Lowe's Cos., the nation's second-largest home improvement chain, posted earnings that easily beat Wall Street's forecasts and raised its full-year profit outlook.
Lowe's closed up $1.49, or 8.1 percent, at $19.94.
Buying accelerated later in the day when the National Association of Home Builders said its housing market index rose for the second month in a row in May. The report reflected growing optimism among builders, an encouraging sign that housing activity might be picking up.
Homebuilding stocks soared on the news. Beazer Homes USA Inc. rose 47 cents, or 20 percent, to $2.81, while Lennar Corp. rose $1.21, or 13.7 percent, to $10.02.
Financial stocks also surged after a spate of analysts issued promising outlooks for the troubled banking industry.
Rochdale Securities analyst Richard Bove noted the potential for "explosive earnings growth and unusually strong stock price performance" for banks as the economy recovers. Goldman Sachs raised its rating on Bank of America Corp. to "Buy" on expectations for solid earnings in the second quarter. And BMO Capital Markets upgraded its view of the banking industry, anticipating that profits will start to rebound in coming quarters.
Bank of America rose $1.06, or 9.9 percent, to $11.73.
State Street Corp. was another big gainer after it became the latest bank to turn to the capital markets to raise money. The commercial bank said it expects to raise about $1.45 billion through a stock offering as part of an effort to repay a $2 billion government loan that came as part of the financial rescue program last fall.
State Street rose $3.28, or 8.5 percent, to $41.79.
Analysts say the ability of banks to raise cash is a welcome sign of strength, even if the introduction of added shares makes those already in circulation worth somewhat less.
"The banks are stable," Cox said. "We're not going to see any of the large banks go down. And now that we have stabilization in the banking system, we can move forward."
In other trading, the Russell 2000 index of smaller companies rose 18.95, or 4 percent, to 494.79.
About nine stocks rose for every one that fell on the New York Stock Exchange, where volume came to 1.42 billion shares.
Energy stocks were lifted by a sharp gain in oil prices. Crude rose $2.69 to $59.03 a barrel as investors made bets that demand would be strong throughout the summer driving season, which kicks off this weekend with the Memorial Day holiday.
The dollar fell against other major currencies. Gold prices also fell.
Stocks overseas were mixed following weak corporate earnings reports in Asia. Japan's Nikkei stock average fell 2.4 percent. Britain's FTSE 100 jumped 2.3 percent, Germany's DAX index rose 2.4 percent, and France's CAC-40 rose 2.4 percent.