News that retail sales topped expectations in March also helped give a lift, according to Art Hogan, chief market strategist at Jefferies & Co.
"It's a combination of the economic numbers sort of falling in line and earnings season starting with more good news than bad news," he said. "The argument can be made that the bar has been set extremely low, but so far earnings are positive."
The Dow Jones Industrial Average gained 108 points at 12,720, after earlier gaining over 120 points to a high of 12,731. The Dow has now resurfaced above its February 27 level, when it took a 416-point plunge and weakened further through early March.
The blue-chip average was lifted by a 2.6% gain in shares of Citigroup , whose operating earnings beat analysts forecasts.
Citigroup's upbeat results also lifted other financial shares on the Dow such as American Express Co. and JP Morgan Chase & Co. .
"With last week's rise, many of the markets are back to within a day or two of the yearly highs and with the promise of better than expected earnings, the markets are once again racing higher," said Paul Nolte, director of investments at Hinsdale Associates, in a note.
"But racing might be a bit strong, if we look at volume as the speed at which everyone is willing to buy stocks," he said.
Market gains have taken place on low volumes while declines have seen high volumes, Nolte said, noting that this indicated more willing sellers than buyers in the market.
"Our daily data is once again knocking on the door of being in dangerously high territory and any missteps in the earnings season could put the market in a defensive posture," he said.
The S&P 500 rose 15 points to 1,468, a seven-year closing high. The Nasdaq Composite , meanwhile, gained 26 points to 2,518.
Among technology shares, Google rose 1.7% after saying it has expanded its agreement with Clear Channel Communications , the nation's largest radio station owner, to sell advertising on as many as 675 radio stations.
And Amazon.com jumped 6.6% after Deutsche Bank upgraded the stock to buy from hold.
Trading volumes showed 1.2 billion shares exchanging hands on the New York Stock Exchange and 1.8 billion shares trading on the Nasdaq stock market. Advancing issues outpaced decliners by 23 to 8 on the NYSE and by 21 to 8 on the Nasdaq.
By sector, banks , broker/dealers and broad financials led the gains.
Also boosting financials, Wachovia Corp. gained 2% after its earnings topped analysts forecasts.
Natural gas was among the few weaker sectors Monday.
On Friday stocks posted gains on the day and week, benefiting from upbeat earnings and forecasts from blue-chip stocks, including Merck & Co., General Electric Co. and McDonald's Corp. .
The positive momentum extended into Monday's session, as investors first found encouragement in the latest batch of earnings reports and merger announcements.
Continuing the flow of leveraged money taking publicly-traded companies private, an investor group led by J.C. Flowers & Co. reached a deal to buy Sallie Mae parent, SLM Corp., for $25 billion, or $60 a share.
SLM shares jumped 18.4% to $55.35. The stock of the educational financing provider already gained 15% on Friday, following initial reports of a potential buyout. After the deal closes, the company will remain subject to oversight by Congress and the Department of Education.
In other merger news, Quest Diagnostics Inc. fell 4.8% after news that it is buying closely held AmeriPath Inc., which provides diagnostic services.
Oil, ising rates could cloud horizon
Monday's early optimism, however, could soon meet a barrage of concerns, according to Marc Pado, market strategist at Cantor Ftizgerald. "Once the initial dust settles, investors will have to keep an eye on oil and interest rates. Those are two bearish pulls on the market," he said.
Amid slowing economic growth -- and slowing earnings growth -- investors had been hoping that the Federal Reserve would soon step in and cut interest rates to stave off a hard landing of the economy.
But inflationary pressures - including from employment and rising energy prices - have dampened those hopes. Meanwhile, rising gasoline prices also cuts into consumer spending.
"While [oil and rates] are not on the front burner at the moment, they are simmering in the background," Pado said. "If one or the other begins to boil over, it will be a negative distraction for investors."
On Monday, at least, crude oil prices fell, while bonds rose, helping keep market rates contained.
Crude-oil futures reversed early gains made amid concern that unrest during Nigeria's approaching presidential elections may disrupt oil supply. A barrel finished down 2 cents at $63.61. The contract lost 1% last week.
And after reversing direction several times, the benchmark 10-year Treasury bond ended on a gain of 7/32 at 99 3/32 with a yield of 4.735%.
Bonds, which react negatively to inflation, rose after news that manufacturing activity in the New York area rebounded only marginally in April. The Empire State Manufacturing index inched higher to 3.8 in April from 1.9 in March, while economists expected a rebound to 7.6 after the index's 22-point plunge in March.
Meanwhile, news that retail sales picked up in March was offset by the fact that most of the gains came from higher gasoline prices.
The dollar fell against the euro, while it rose against the yen. The Japanese currency fell across-the-board after the Group of Seven leading industrial nations failed to address the weakness in the Japanese currency at their weekend meeting.
Gold futures were boosted by a weakening dollar. Gold for June delivery rose $4.60 to $694.50 an ounce on the New York Mercantile Exchange.
For all markets, Tuesday's data on March consumer prices, housing starts and industrial production will be key to provide a picture on inflation and economic growth.
All these numbers "could be bad," said Jefferies' Hogan. "But I'm not sure they're going to be the disappointments of the day with investors attention focused on earnings and earnings guidance."
Stocks on the move
Eli Lilly gained 2.7%. The pharmaceutical company reported a drop in first-quarter profit amid acquisition-related charges and costs from a settlement of product-liability litigation, though sales rose 14%.
Amgen Inc. rose 1%. The company received an upgrade to overweight from equal weight from Morgan Stanley.
Toy maker Mattel Inc. posted a 60% decline in first-quarter profit, hurt by a year-ago tax benefit, but strength in its Fisher-Price and Hot Wheels brands as well as its games business helped it beat Wall Street expectations. The stock still fell 0.8%.
By Nick Godt