NEW YORK (CNN/Money) - U.S. stocks surged Monday, with investors extending a two-month rally on hopes for an economic recovery, pushing the Nasdaq and the S&P 500 to new highs for the year.

The Dow Jones industrial average (up 122.13 to 8726.73, Charts) and the Nasdaq composite (up 21.25 to 1541.40, Charts) both closed up about 1.4 percent, with the Nasdaq's gains marking a new 11-month closing high, its best this year. The S&P 500 index (up 11.70 to 945.11, Charts) gained 1.25 percent, its best since late August and also a new closing high for the year.

An upgrade of Cisco Systems gave that stock and other technology shares a boost, as did Sun Microsystems, which took off after passing a key resistance level.

The buying pattern Monday followed what has become somewhat of a routine of late. Investors took some profits at the open in an unsurprising consolidation move after last week's rally and then jumped back in shortly after, pushing stocks higher.

The market's performance showed resilience -- as evidenced by both the stock gains and the decisively positive breadth -- considering the fact that investors were also up against a weak dollar, lower European markets and some higher commodity prices.

"It's quite encouraging. The sentiment is better and you've got the indexes passing the highs of the year and holding, so you've got some technical support as well," said Peter Cardillo, director of research at Global Partners Securities.

Technology leadership continued -- a trend that has been the case since the start of the rally, Cardillo said. Additionally, investors seemed to overlook the long-term negative impact of the weak dollar and instead focused on how it might be a boon for companies that do a lot of international business.

While the sessions gains were a positive, analysts cautioned that such a rapid rise -- about 16 percent on the S&P 500 since mid-March -- could make stocks vulnerable to a more pronounced pullback than the modest consolidation stocks saw last week. An abundance of economic data and technology earnings this week could also challenge the rally.

Applied Materials (AMAT: up $0.64 to $15.72, Research, Estimates) is due to report its quarterly results Tuesday after the close. The firm is forecast to have earned 2 cents, down from 3 cents a year earlier. However, investors will be listening more closely to what the company has to say about its business going forward, particularly in terms of trends in information technology spending. On Monday, Applied Materials' stock gained 4.2 percent.

The only economic report due Tuesday is the March trade balance, which is not usually a market mover.

Monday marked the start of a week in which investors will gain a lot more information on how the economy has been doing since the end of the war in Iraq. The week's reports include the Philadelphia Fed index, April retail sales, business inventories, housing starts and building permits, as well as consumer prices and producer prices.

Many expect to see continued weakness in the April numbers, some of it attributed to the lingering effects of the war. But just as many probably hope to see signs that improvement is on the way.

The market has been on something of an uptrend for the last two months, with the S&P 500 up about 16 percent since mid-March on hopes that the end of the war in Iraq would foster a period of economic growth. That hasn't happened yet, but the optimism remains. Analysts said market sentiment has changed to the point where investors want to see the market go up and are willing to focus on the positive.

"The market is looking better. The mentality is good. They're buying on the dips," said Brian Finnerty, managing director at Melhado, Flynn & Associates. "Maybe we've finally broken out of the downtrend. It's not just the hedge funds. You're seeing mutual fund money coming in. You're seeing the individual investor start to come back in."

Providing a springboard for technology shares, Cisco Systems (CSCO: up $0.72 to $16.67, Research, Estimates) rose 4.5 percent after Lehman Brothers upgraded the stock to "overweight" from "equal weight," saying investor confidence in 2004 estimates should get better after a strong April and good signs for May. The firm also raised Cisco's share price target to $18 from $17.

Server maker Sun Microsystems (SUNW: up $0.34 to $4.21, Research, Estimates) also rallied, adding 8.8 percent as the stock broke through the $4.01 key resistance level. The Amex Networking (up 6.13 to 183.89, Charts) index added 3.4 percent.

Dell (DELL: up $0.81 to $31.90, Research, Estimates), which is scheduled to report its latest quarterly results Thursday, advanced 2.6 percent.

Shares of Dow stock Altria Group (MO: up $1.40 to $33.10, Research, Estimates) added 4.4 percent after a Barron's story over the weekend said the stock could rise more than 26 percent by the end of the year, provided that, among other things, the company sees favorable legal decisions and starts its stock buyback program again.

The Dow's other big advancer was SBC Communications (SBC: up $0.97 to $24.64, Research, Estimates), which rose 4.1 percent. The stock's surge was likely tied to a vote by the Illinois state assembly last Friday to let SBC sharply raise the wholesale rate it charges companies such as AT&T (T: down $0.04 to $16.47, Research, Estimates) to lease its services. In a morning note, CIBC World Markets called the move a watershed event for the company.

Dow aerospace stocks such as Honeywell (HON: up $0.74 to $24.93, Research, Estimates) and United Technologies (UTX: up $2.05 to $66.85, Research, Estimates), as well as McDonald's (MCD: up $0.71 to $18.29, Research, Estimates), led the blue-chip advance.

The dollar seemed to stabilize after it took another downturn, dropping to a new four-year low against the euro and losing more ground against the yen in response to comments Treasury Secretary John Snow made over the weekend. He referred to the economy as "soggy" and said a weak dollar was a good thing for U.S. exports, thus suggesting Washington was not entirely against the softening of the currency.

Market breadth was positive. On the New York Stock Exchange, 11 stocks rose for every five that fell as 1.35 billion shares traded. Volume on the Nasdaq was 1.76 billion shares with winners topping losers by a more than five to three margin.

Treasury bonds were up, but well off their highs of the morning. The 10-year note's yield slipped to 3.63 percent as its price gained 14/32 of a point.

European stocks closed flat to lower and markets in Asia ended their session mostly higher.

Oil prices fell, with light crude futures losing 37 cents to $27.35 a barrel in New York. Gold rose $3 to $351.90 an ounce in New York.