NEW YORK U.S. stocks rallied on strong volume on Tuesday, capping off the S&P 500's best two-day run in a month, on confidence that a deal would be struck in Washington to avoid painful spending cuts and tax hikes that could hurt the economy.
Banks, energy and technology - sectors that would benefit during economic expansion - led gains as investors remain confident that lawmakers will come to an agreement to avoid the so-called "fiscal cliff" deadline at the end of the year.
The PHLX oil services sector index .OSX jumped 3.1 percent, with eight of its 15 components up 3 percent or more.
"The view is that the economy is getting better, and that is always good for energy demand," said Shawn Hackett, president at Hackett Financial Advisors in Boynton Beach, Florida.
Hackett said the United States would avoid "whatever the cliff means" for the economy, allowing investors to focus on growth.
President Barack Obama's most recent offer to Republicans in the ongoing budget talks makes concessions on taxes and social programs spending. House Speaker John Boehner said the offer is "not there yet," though he remains hopeful about an agreement. Senate Democrats, however, have expressed concern about cuts to Social Security.
Financial stocks shot higher, as traders bet on a greater demand for loans and a steepening of the yield curve. U.S. government debt sold off Tuesday, with the benchmark 10-year U.S. Treasury note's yield briefly hitting its highest since late October.
The S&P financial sector .GSPF added 1.5 percent.
The Dow Jones industrial average .DJI rose 115.57 points, or 0.87 percent, to 13,350.96 at the close. The S&P 500 .SPX gained 16.43 points, or 1.15 percent, to 1,446.79. The Nasdaq Composite .IXIC added 43.93 points, or 1.46 percent, to 3,054.53.
It was the S&P 500's first back-to-back gain of more than 1 percent since late July.
Stocks of smaller companies outperformed the broader market, with the Russell 2000 .RUT up 1.5 percent.
Shares of firearm makers sank in the aftermath of a school shooting in Newtown, Connecticut, on Friday that killed 20 young children and six adults.
Smith and Wesson (SWHC.O) fell 10 percent to $7.79 on its largest-ever daily volume, though it was still up about 77 percent so far this year. Sturm Ruger and Co (RGR.N) slid 7.7 percent Tuesday to $40.60.
Private equity firm Cerberus Capital Management said it would sell gunmaker Freedom Group, whose Bushmaster AR-15 rifle was used in the Connecticut massacre. Dick's Sporting Goods (DKS.N) suspended the sale of certain semi-automatic rifles in its stores nationwide.
Technology shares rose, led by Apple (AAPL.O), up 2.9 percent at $533.90 after losing nearly 13 percent in the last two weeks. The S&P Information Technology Index .GSPT rose 1.7 percent.
Arbitron Inc ARB.N surged 23.6 percent to $47.03 after Nielsen Holdings NV (NLSN.N) agreed to buy the media and marketing research firm in a deal worth $1.26 billion. Nielsen rose 4.4 percent to $30.92.
About 7.4 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, more than the daily average so far this year of about 6.5 billion shares.
On the NYSE, roughly 14 issues rose for every five that fell, while on the Nasdaq, advancers outnumbered decliners by a ratio of about 5 to 2.
(Reporting by Rodrigo Campos; Editing by Jan Paschal)