The earnings, led by DaimlerChrysler AG and Bristol-Myers Squibb Co., further fueled investors' confidence in the stability of the economy. They also helped Wall Street look past a slight rise in first-time jobless claims reported by the Labor Department and another sharp rise in oil prices. A barrel of light crude settled at $59.94, up 83 cents, on the New York Mercantile Exchange.

The question on many investors' minds, however, was how high the markets can go, and whether the economy over the second half of the year will support those higher share prices.

"Obviously, we had a nice day yesterday, so now I tend to think that we're digesting all these earnings and figuring out whether we can move higher," said Jay Suskind, head trader at Ryan Beck & Co. "The news has been very good, but now the market's pricing in the second half of the year even more."

The S&P 500 climbed 6.93, or 0.56 percent, to 1,243.72, its best close since June 12, 2001. The Nasdaq gained 12.22, or 0.56 percent, to 2,198.44 for its best showing since June 8, 2001.

The Dow Jones industrial average rose 68.46, or 0.64 percent, to 10,705.55, its highest level since March 15.

Bonds gained ground after the previous session's selloff, with the yield on the 10-year Treasury note falling to 4.20 percent from 4.26 percent late yesterday. The dollar was mixed against other major currencies, while gold prices rose.

The market's reaction to second-quarter earnings was notable given the response to first quarter results in April, when the stock markets dropped considerably.

"This time around, we're seeing a strong reaction to very positive reports," said Todd Salamone, director of trading and vice president of research at Schaeffer's Investment Research in Cincinnati. "A lot of economic questions are still out there, but it looks like with these earnings, people are thinking that we'll be OK through the third quarter, at least."

DaimlerChrysler surged 9.8 percent, or $4.29, to $48.26 after the company also posted slightly improved earnings. The stock was also helped by CEO Juergen Schrempp's announcement that he would leave by the end of the year.

Drug maker Bristol-Myers Squibb rose 7 cents to $25.17 as the company posted a 91 percent surge in second-quarter income. Bristol-Myers credited strong sales of new drugs for the better-than-expected quarter. The company surpassed analysts' forecasts by 11 cents per share.

Dow component Exxon Mobil Corp. said the recent surge in crude oil and natural gas prices were critical to its record second-quarter earnings, which rose 32 percent from a year ago. Although the energy company missed Wall Street's profit forecasts by a penny per share, Exxon Mobil added 40 cents to $60.

Stronger sales helped defense contractor Northrop Grumman Corp. raise its earnings 23 percent in the second quarter. Northrop, which also increased its full-year earnings forecasts, beat Wall Street's expectations by 12 cents per share. The company's stock nonetheless lost 52 cents to $56.18.

Health insurer Aetna Inc. added $3.78 to $78.40 after the company saw a 43 percent jump in quarterly profits thanks to higher membership levels, cost cutting and strong underwriting results. Earnings per share were right in line with analysts' expectations, but Aetna's full-year outlook was slightly lower than Wall Street's forecasts.

Drug maker AstraZeneca said its CEO, Tom McKillop, will retire at the end of the year as well. The company also saw a 50 percent rise in quarterly profits. AstraZeneca climbed $2.03 to $44.14.

Federated Department Stores Inc. added 47 cents to $76.24 after it announced plans to sell 68 stores, representing $2 billion in sales last year, as part of its consolidation from its recent merger with May's Department Stores. The company also said a number of May's stores — Famous-Barr, Filene's, Hecht's and Kaufmann's among them — will become Macy's branches in 2006.

Advancing issues outnumbered decliners by more than 5 to 2 on the New York Stock Exchange, where preliminary consolidated volume came to 2.02 billion shares, compared with 1.98 billion yesterday.

The Russell 2000 index of smaller companies was up 8.16, or 1.21 percent, at 683.04.

Overseas, Japan's Nikkei stock average rose 0.2 percent. In Europe, Britain's FTSE 100 was up 0.13 percent, France's CAC-40 climbed 0.66 percent for the session, and Germany's DAX index gained 0.77 percent.