Stocks close sharply up, driven by earnings

By Abby Schultz, CNBC.com

Stocks closed sharply higher in a rally sparked by strength in the technology and manufacturing sectors, although bank stocks weakened after Wells Fargo reported a slide in revenue.

The Dow Jones Industrial Average gained about 187 points to close at about 12,454, following a modest gain on Tuesday.

Among Dow components, Intel, United Technologies and Johnson & Johnson advanced, while Pfizer slipped.

The S&P 500 and the Nasdaq also rose sharply. The CBOE Volatility Index, widely considered the best gauge of fear in the market, fell to nearly 15.

All key S&P 500 sectors gained, led by technology, energy and consumer discretionary.

The market continues to wrestle with two simple things: cautious optimism around the recovery and uncertainty over the direction of monetary and fiscal policy, said Doug Godine, head of equities at Signal Hill Capital.

The signs of a good recovery, and not an overheated one, are evident in strong corporate balance sheets and in reasonable expectations by corporations, Godine said.

That good news, reflected in Wednesday's rally, is tempered by the lack of clarity over the future direction of monetary and fiscal policy as Congress and Obama wrestle over the budget, he added.

"What is going to be our stance on debt ceilings? What will be our stance on budget cuts? Where will this shake out in terms of budget bill?" Godine asked. "At some point we’re going to have to figure out what our long-term monetary policy is."

Mark Lamkin, CEO of Lamkin Wealth Management, agrees first quarter earnings are giving investors a legitimate reason to buy stocks, but he is bracing his clients for earnings to suffer "deep" into the second half of the year as rising costs of energy and raw materials hit corporate earnings, along with the effects of austerity policies in the U.S.

"You’re setting up this market for a pretty big correction in the second half of this year," Lamkin said, expecting the market will fall between 12 and 14 percent.

For now, however, Lamkin remains invested in the market, saying "I’m going to ride this thoroughbread as far as it goes," but he added that he's "not afraid to go to 50 percent or 60 percent cash if these trends start to break down."

Investors cheered earnings as they showed companies are benefiting from growing global demand for goods and services. Manufacturers United Technologies and Eaton, for instance, reported better-than-expected results before the market opened Tuesday as global demand for their products rose. Both manufacturers also raised their full-year earnings forecasts.

And AT&T fell despite delivering earnings of 57 cents a share, in line with expectations. The results showed the wireless phone company continued to grow despite the loss of exclusive U.S. rights to Apple's iPhone. AT&T's first quarter net income rose to $3.4 billion from $2.5 billion a year ago.

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