NEW YORK (MarketWatch) -- U.S. stocks rallied Friday, lifting the Dow Jones Industrial Average to another record high while the broader market scored strong weekly gains, following a rebound rally in Asian markets overnight and better-than-expected earnings from the likes of Caterpillar Inc. and Google Inc.
"The market is being helped by earnings coming in better than expected," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank. "Everything is pointing to a slowing economy, but companies seem to be handling that quite well, either raising guidance or keeping it the same," he said.
The Dow Jones Industrial Average rallied 153 points to close at 12,961, a new record high. It earlier touched an intraday record high of 12,966. For the week, the Dow powered ahead with a 2.8% advance, marking its third straight week of gains.
Caterpillar helped lift the blue-chip average, jumping 4.7%. The company's first-quarter net income fell below the year-earlier level, but still topped analysts' estimates. Caterpillar also raised its guidance.
Also in the Dow, Honeywell International Inc. , rose 4.8%, while American Express Co. gained 3.5%, both after their earnings topped expectations. Read more about and earnings.
McDonald's Corp. was among the Dow components in negative territory, after saying it will take a second-quarter charge to franchise operations in Latin America and the Caribbean.
And Pfizer Inc. also dropped after posting a drop in earnings and cutting its 2007 financial forecast, citing an earlier-than-expected patent loss for its second best-selling drug, Norvasc.
The S&P 500 rose 13 points to 1,484, reaching a 6-and-a-half-year high. For the week, the broad index advanced 2.2%.
The Nasdaq Composite jumped 21 points to 2,526, a six-year high. On the week, the technology-heavy index gained 1.4%.
Google helped power the tech sector Friday, rising 2.3%. The internet search engine company reported a 69% jump in profit and earnings per share that exceeded Wall Street's expectations.
Trading volumes showed 1.9 billion shares changing hands on the New York Stock Exchange, and 2.2 billion on the Nasdaq stock market. Advancing issues topped decliners by 25 to 7 on the NYSE and by 20 to 9 on the Nasdaq.
Stocks had been advancing this week in spite of a negative advance/decline line, which suggested that "the market was vulnerable," said Elliot Spar, analyst at Ryan, Beck & Co.
Many investors who had made bets that stocks would fall were "forced to buy stocks to cover their short call positions," he said.
By sector, internet , financials , transportation and gold led the gains, while multimedia networking and airlines were among the few sectors falling.
The Philadelphia Exchange Housing Sector Index rose 2%. Shares of home builder NVR Inc. ran up 10% after the company reported first-quarter earnings that fell from year-ago levels but were well above expectations.
"Everybody was concerned about earnings," said Deutsche Bank's Fitzpatrick. "But so far, there's no major impact from a slowing economy on earnings growth."
"But we're not out of the woods by any means," he said. Although investors have put the economy on the backburner during earnings season, "past next week, they'll start to look at economic data again, and it's largely pointing to a slowing economy."
Speaking about the economic outlook, Federal Reserve Board Gov. Frederic Mishkin said in a speech that while uncertainties surrounding the economic outlook have increased recently, he saw no reason to adjust the current interest-rate policy stance.
Once earnings season is over, investors will likely start to fret again about whether or not the Fed will be willing to cut interest rates to prevent a hard economic landing, said Fitzpatrick.
"This will remain a challenging environment until we get confirmation frothe Fed that they're going to stimulate growth, because so far they've kept their foot on the brake."
Asia rallies back
Stock markets ended mixed Thursday after recovering from early losses, as investors looked past concerns about an overheating Chinese economy and focused on earnings from Merrill Lynch , Bank of America and Merck & Co. , among others.
Overnight there were brisk recoveries on Asian exchanges, with the Shanghai Composite Index rallying 4.6% and the Hang Seng gaining 1.1%. .
"The market was worried yesterday about a China sell-off, but China recovered today," said Peter Boockvar, equity strategist at Miller Tabak. "The market has been trending higher and the path of least resistance is higher," he said.
Speaking to a business group in New York, U.S. Treasury Secretary Henry Paulson said that China's growth and stability is "vital for all nations."
Stocks in motion
H&R Block Inc. advanced more than 3%. The company agreed to sell its Option One Mortgage business, which has some subpime loans, to OOMC Acquisition Corp, a newly formed company affiliated with Cerberus Capital Management. H&R Block also said that it expects to report a loss for fiscal 2007.
Clear Channel Communications fell 0.6% after it agreed to sell its television station group to Providence Equity Partners for about $1.2 billion.
Schlumberger Ltd. also had earnings that exceeded analysts' projections. The stock recovered from early weakness gaining 1.2% Friday, continuing its surge since early March.
The dollar rose slightly against other major currencies, recovering from a more than two-year low vs. the euro of $1.3636 reached overnight. "Sentiment remains favorable and a new all-time high near $1.3665 is awaited," said Marc Chandler of Brown Brothers Harriman.
Crude-oil futures recouped part of their prior day losses due to the global equity markets rebound and ahead of elections in Nigeria, a major producer, over the weekend. Crude for May delivery was last up $1.55, or 2.5%, at $63.38 a barrel.
Gold futures rose sharply, fuelled by a falling dollar and rallying crude-oil prices, as traders shrugged off Thursday's worries that growth will force the Chinese government to take steps to cool the economy.
Gold for June delivery rallied $7.50 to close at $696.60 an ounce on the New York Mercantile Exchange.
Treasurys were slightly lower, as stocks rallied amid a dearth of U.S. economic reports on Friday. The benchmark 10-year note last was 1/32 higher at 99-22/32 with a yield of 4.666%.
By Nick Godt