Stocks close on highs as markets await crucial jobs figures

Stocks soared to fresh closing highs on Thursday, one day before the government releases critical jobs figures that could help determine whether the economy is healthy enough for the Federal Reserve to begin to slow down its stimulus package.

The rally, in which the S&P 500 went through the 1,700-point level for the first time, was sparked by a plethora of upbeat economic data ahead of the widely-watched jobs report set for Friday morning.

Analysts polled by Reuters expect to see a gain of 184,000 jobs in July, after a 195,000 uptick in the previous month. 

(Read more: July jobs report key to Fed action)

"The jobs numbers have been decent as of late, but the problem is the quality of employment," said Lance Roberts, chief economist at StreetTalk Advisors. "There's also clearly a divergence between the stock market and real economy and that's because of the artificial stimulus from the Fed.

"The problem is that they're not seeing that stimulus being translated into the economy so the worry we should have is that we're inflating valuations and the issue of potentially blowing an asset bubble is very real."

On Wednesday, the Federal Reserve declined to signal when it would start tapering its bond-buying program, which has buoyed the markets. However, it did raise concerns about rising mortgage rates and flagged the risks of inflation falling too far below its target. In addition, the central bank slightly downgraded its outlook for economic growth.

But several reports on Thursday boosted the views of many analysts that the economy is getting healthier. Weekly jobless claims dropped to a 5-1/2 year low, according to the Labor Department. And the number of planned layoffs at U.S. firms declined modestly in July, with employers announcing 37,701 cuts last month, down 4.2 percent from June, according to the report from consultants Challenger, Gray & Christmas.

In another positive sign, the pace of growth in the U.S. manufacturing sector accelerated in July to the highest level since June 2011 as new orders surged, according to the Institute for Supply Management. 

The positive economic data have stimulated the stock markets recently. Major stock averages closed out their best July since 2010 on Wednesday and so far this year, the Dow and S&P 500 have spiked more than 19 percent, while the Nasdaq has surged an impressive 21 percent.

On Thursday, the Dow Jones Industrial Average spiked to close 128 points higher and set a fresh all-time high of 15,650.69, lifted by Bank of America and P&G. ExxonMobil was among the few Dow components in the red.

The S&P 500 and the Nasdaq both put on 1 percent, with the S&P 500 piercing the 1700 barrier to close at 1706.87. The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, slid below 13.

All key S&P sectors closed in positive territory, led by financials and industrials.

"The rising asset prices will help instill confidence and that will breed more confidence," said Matthew Kaufler, portfolio manager of the Clover Value Fund at Federated. 

"However, we've had a great run in the market and at some point there will be a correction in the near point…still, my sense would be that there's enough momentum that we'll end the year up a few percentage points higher than where we currently are."

(Read more:Short the S&P atall-time highs? Absolutely!)

Asian stocks rallied after China's official PMI (purchasing manager's index) data showed the country's manufacturing sector continued to expand in July, defying forecasts of a contraction. But the picture was mixed, with a private gauge of factory activity by HSBC showing an 11-month low of 47.7 in July. Japan's Nikkei rallied to a one-month peak on the news, the Shanghai Composite hit a one-week high and South Korea's Kospi touched a seven-week high.

"Official PMI is more skewed to larger companies, and the HSBC figure reflects the smaller companies and that is where you get this divergence," said Frederic Neumann, co-head of Asian economics research at HSBC.

(Read more: Will China PMI mark the end of negative data surprises?)

In Europe, the European Central Bank kept its main interest rate unchanged at a record low of 0.5 percent, and reiterated that rates would remain at present or lower levels for an extended period of time.

"Labor market conditions remain weak. Looking ahead to the remainder of the year and 2014, euro area growth should benefit from a gradual recovery in global demand," said ECB president Mario Draghi in a press conference following the announcement. "Our monetary policy stance remains accommodative for as long as necessary. We have unanimously confirmed the forward guidance we gave last time."

Euro zone manufacturing activity grew for the first time in two years in July, with the purchasing manager's index (PMI) climbing to 50.3 in July. A reading above 50 indicates an expansion.

And the Bank of England left its interest rates unchanged at 0.5 percent, as expected, under its new governor, Mark Carney.

(Read more:July jobs report key to Fed action)