The stock market rebounded as traders placed bets that the outcome of an election in Massachusetts would make it harder for President Barack Obama to make changes to health care.
The Dow Jones industrial average rose 116 points to a 15-month high after falling 101 on Friday. Broader indexes also rose and demand for the safety of government debt waned.
The vote Tuesday to fill the seat of late Sen. Edward M. Kennedy could shift power in the Senate if Republican Scott Brown wins. That would give Republicans the 41 votes necessary to block Democratic proposals, including the health care bill. Polls were set to close four hours after the closing bell on Wall Street.
Rising health care stocks led the market higher as the prospect of a logjam in Washington eased concerns that profits at companies like insurers and drug makers would suffer.
Technology shares rose smartly after a Credit Suisse analyst raised his rating on Ciena Corp., a maker of telecommunications equipment, predicting that revenue would exceed expectations.
Technology shares are sure to be a key focus for the market Wednesday after IBM Corp. reported a 9 percent increase in earnings late Tuesday for the final three months of 2009. The company said after the closing bell that its revenue rose for the first time in a year and a half. IBM also predicted that 2010 earnings will come in at the high end of its previous forecast.
Tuesday's gains came after stocks fell Friday when JPMorgan Chase & Co.'s quarterly results fell short of expectations. U.S. markets were closed Monday for Martin Luther King Jr. Day.
Analysts said that beyond a possible shift in prospects for health care changes, the week's earnings reports will help chart the market's course in the coming months as companies update their expectations for the economy.
The stock market has been climbing for 10 months on hopes that an easing recession would boost corporate profits. But lingering problems like high unemployment and a weak housing market have raised questions about whether the rally has been overdone.
"This is just a critical period when we get to see the litmus test of earnings and then guidance," said Philip S. Dow, managing director of equity strategy at RBC Wealth Management in Minneapolis.
The Dow rose 115.78, or 1.1 percent, to 10,725.43. The broader Standard & Poor's 500 index rose 14.20, or 1.3 percent, to 1,150.23. It was the highest close for the Dow and the S&P 500 index since Oct. 1, 2008.
The technology-heavy Nasdaq composite index rose 32.41, or 1.4 percent, to 2,320.40.
Brett Hryb, a portfolio manager with MFC Global Investment Management in Toronto, said a defeat of the health bill could help some companies but that a win by Brown would not necessarily doom the proposed changes.
"It's not a slam dunk by any means," he said.
Among health stocks, insurers Aetna Inc. rose $1.30, or 4.2 percent, to $32.66 and UnitedHealth Group Inc. rose $1.38, or 4.1 percent, to $35.13. Pharmaceutical company Merck & Co. advanced $1.15, or 2.9 percent, to $40.62 and was the biggest advancer among the 30 stocks that make up the Dow industrials.
Ciena jumped $1.28, or 11 percent, to $12.91. IBM rose $2.36, or 1.8 percent, to $134.14, but fell 1.7 percent in electronic trading after its report.
Citigroup Inc. rose 12 cents, or 3.5 percent, to $3.54 after reporting a fourth-quarter loss of $7.6 billion mostly tied to repayment of $20 billion in government bailout money. The company said it is starting to see some stabilizing in the number of mortgage and credit card loans that are past due.
Earnings reports are due this week from Bank of America Corp., eBay Inc., General Electric Co., Goldman Sachs Group Inc., Google Inc., Morgan Stanley and Wells Fargo & Co.
Investors are hunting for clues about whether the market will continue its run in 2010 or begin to sputter if the economy doesn't show more signs it is strengthening.
"Everybody is looking for that catalyst that is going to take us higher," said Anthony Conroy, managing director and head trader for BNY ConvergEx Group. He contends that the market will find strength from companies that surprise investors by reporting stronger profits.
But Hryb said the run in stocks since March has left stocks with rich valuations and that even with big earnings stocks could be getting pricey.
"It is a tug-of-war between the growth in the earnings and what people are willing to pay for those earnings," Hryb said.
Bond prices fell, pushing their yields higher. The yield on the benchmark 10-year Treasury note rose to 3.71 percent from 3.68 percent late Friday.
The dollar mostly rose against other major currencies. Gold advanced, while crude oil rose $1.02 to settle at $79.02 per barrel on the New York Mercantile Exchange.
More than three stocks rose for every one that fell at the New York Stock Exchange, where volume fell to 1 billion shares from 1.4 billion Friday.
The Russell 2000 index of smaller companies rose 11.19, or 1.8 percent, to 649.15.
Britain's FTSE 100 added 0.3 percent, Germany's DAX index rose 1 percent, and France's CAC-40 gained 0.8 percent. Japan's Nikkei stock average fell 0.8 percent.