NEW YORK (CNNmoney) - A batch of encouraging profit reports set off a rally on Wall Street Thursday that returned two major stock indexes to pre-terrorist attack levels.
The Nasdaq composite index and Standard & Poor's 500 index erased all of their losses since Sept. 11, which led to the steepest weekly stock selloff since the Great Depression.
Stocks face plenty of hurdles ahead. But Thursday's milestone held symbolic power for a market that reopened only three weeks ago last Monday.
"I think the market's once again proven that it has recovered from adversity," Eugene Profit, president of Profit Funds, told CNNfn.
For investors, upbeat financial news from General Electric, Yahoo!, E*Trade and others signaled that post-attack economic recovery efforts may be taking hold.
"Both the economy and profits are going to turn," said Charles Pradilla, chief investment strategist at S.G. Cowen, who credited the government's campaign of slashing borrowing costs and offering billions of dollars in economic aid.
Pradilla also said the markets are heartened by America's ability to return to relative normalcy amid U.S.-led retaliation against Afghanistan.
The market is not without challenges. First-time claims for jobless benefits, though lower last week, remained high, the government reported Thursday. Retailers posted mostly disappointing sales figures last month. And looking ahead, consumer confidence figures due Friday are expected to be weak.
But more than a year of rising Treasury bond prices has pushed yields to unattractive levels, helping draw investors to the stock market for a third straight week.
The Nasdaq gained 75.21 points, or 4.6 percent, to 1,701.47, above its Sept. 10 close of 1,695.38. The Standard & Poor's 500 index gained 16.44, or 1.5 percent, to 1,097.43, besting the 1,092.54 reached on the eve of the attack.
The Dow industrials added 169.59, or 1.8 percent, to 9,410.45, but not surpassing the Sept. 10 close of 9,605.85.
More stocks rose than fell on heavy volume. On the New York Stock Exchange, advancing issues topped declining stocks by almost 2-to-1 as 1.6 billion shares traded. Nasdaq winners beat losers by more than a 2-to-1 margin as 2.4 billion shares changed hands.
In other markets, the dollar gained against the euro and yen. Treasury securities fell for a third session.
Rare good news
One of the Dow's biggest gainers, General Electric (GE: up $1.03 to $38.94, Research, Estimates) earned 33 cents per share in the third quarter, in line with expectations. The conglomerate also said it's confident of hitting full-year earnings forecasts.
On the Nasdaq, Yahoo! (YHOO: up $1.57 to $12.50, Research, Estimates) said late Wednesday that profit tumbled to 1 cent per share, matching forecasts. Facing a tough time for selling ads, executives at the media company lowered their financial targets for the current quarter.
But the Internet company pledged to restructure and reported a huge rise in traffic from people hungry for news and contact since the September attacks. Three firms, Merrill Lynch, Credit Suisse First Boston and Robertson Stephens, cut Yahoo!'s profit forecasts, but Morgan Stanley called Yahoo!'s shares compelling.
Investors appeared to agree, sending Yahoo! shares up as much as 16 percent.
Redback Networks (RBAK: up $0.82 to $2.46, Research, Estimates), a maker of broadband and networking equipment, lost 28 cents per share, less than Wall Street expected.
E-Trade (ET: up $1.19 to $7.85, Research, Estimates), the online brokerage, reported a quarterly operating profit that rose above expectations and upped its forecast for the remainder of the year.
Genentech (DNA: up $3.50 to $44.30, Research, Estimates), which posted a 22 percent jump in quarterly earnings, said it's on track to meet the higher end of its 2001 earnings per share growth target.
But John Forelli, portfolio manager at Independence Investment, called the market's optimism unjustified.
"The market looks better than it did a month ago, yet the near-term outlook for most companies is probably worse," Forelli said.
In the day's only major economic report, the number of Americans filing for unemployment claims fell by 67,000 last week to 468,000 but remained at high levels.
Economists expect the unemployment rate, which stood at 4.9 percent in September, to rise in the months ahead.
Still, investor nervousness about a long war on terrorism has been easing. The U.S.-led retaliation grew more intense Thursday, with cities in Afghanistan under a blistering air assault. Rumors, denied by the Pentagon, spread that the terrorist suspect Osama bin Laden had been captured.
"That, psychologically, could have been a reason for the (big stock market) move this morning," Joe Cangemi, trader at Francis P. Maglio, told CNNfn's Market Call.
With the economy slowing, the U.S. government has slashed interest rates, cut taxes and offered to aid ailing industries and pay for rebuilding New York.
Stocks most sensitive to an economic rebound rallied Thursday, with gains in General Motors (GM: up $1.97 to $44.93, Research, Estimates), Citigroup (C: up $1.44 to $45.75, Research, Estimates) and Home Depot (HD: up $2.89 to $43.10, Research, Estimates).
But the session saw several losers. Drug stocks Merck (MRK: down $0.31 to $68.18, Research, Estimates), Johnson & Johnson (JNJ: down $1.10 to $54.94, Research, Estimates) and Pfizer (PFE: down $1.49 to $40.26, Research, Estimates) all fell.
So did insurer Allstate (ALL: down $3.43 to $32.85, Research, Estimates), which said third quarter income would fall short of estimates, and Gap (GPS: up $0.15 to $13.73, Research, Estimates), which reported that sales at stores open at least a year fell 17 percent last month.
While Wal-Mart Stores (WMT: down $0.14 to $53.49, Research, Estimates) said sales at stores open at least a year rose 6.3 percent, most retailer had trouble last month.
Friday brings more clues about the economy's performance since Sept. 11. Wholesale prices for September are expected to post a gain of 0.1 percent, according to a consensus of economists surveyed by Briefing.com, as inflation remains subdued. Retail sales are seen tumbling 0.7 percent last month, as consumers facing a surge in layoffs retrenched.
Consumer sentiment, as measured by the University of Michigan's survey, is expected to have slid in a preliminary reading for October.
"I think that of the three, the sentiment numbers are most important," Linda Jay, NYSE trader at Labranche & Co, told CNNfn's Market Call.
The sentiment figures give a first look at how spending attitudes have changed since the attacks raised fears about travel, job security and war. 
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