NEW YORK (CNN/Money) - The major indexes surged Friday to their highest levels of the year, with investors betting that signs of expansion in a May Chicago manufacturing survey will bode well for Monday's national manufacturing survey and a broader economic recovery.

"I think you'll probably see an extension of this rally next week, barring any surprises over the weekend and assuming the ISM number Monday is positive," said Bill Roe, portfolio manager at Melhado, Flynn & Associates.

And it sure better be, because the market has been gaining for three months on hopes for a second-half recovery, despite the fact that few economic reports have justified such confidence.

Investors have been able to dismiss ho-hum reports and keep buying by blaming any weakness in February, March and April data on their close proximity to the Iraqi war. But to use the war as an explanation for any weakness in May would be something of a stretch. May has been pointed to by a number of market watchers as the month that needs to start delivering on the investor optimism.

So Friday's strong May reading on regional manufacturing cheered investors, enabling them to overlook other lackluster reports released earlier in the day, including flat readings on personal spending and income in April and another May report, the final reading of the University of Michigan's consumer sentiment index, which shrank from earlier estimates but still showed monthly growth, although not as much as analysts had expected.

"The Chicago number showed manufacturing has been picking up in the Midwest. That bodes well for the national number Monday, all of which supports the idea of a recovery, which is what the market has been betting on," said Peter Cardillo, director of research at Global Partners Securities.

Over the next few weeks, May numbers are going to need to start delivering consistently for stocks to continue to rally, and next week brings a whole spate of them.

But with stocks rising so far so fast, there is the danger of a pullback, Cardillo said, particularly if next week's heavy spate of reports should disappoint.

The National Association of Purchasing Management - Chicago said Friday that its May index jumped to 52.2 A reading above 50 indicates expansion in the manufacturing sector. Though Monday's Institute for Supply Management (ISM) national manufacturing index is expected to show growth in May from the previous month, it is also expected to remain below that key 50 level. Economists polled by Reuters currently expect it to rise to 47.6 from 45.4 in April. (For more on what today's Chicago report says about the national report, click here.)

Monday also brings reports on auto and truck sales for May, which are expected to remain mostly flat, and an April construction spending report, which is expected to show a rise.

Other key data due later in the week include the May ISM report on the services sector of the economy, weekly jobless claims and the May reading on unemployment, due next Friday. Unemployment for May is forecast to have risen to 6.1 percent from 6 percent in April, and employers are expected to have continued to cut jobs from their payrolls, reviving concerns about how the lagging labor market may deter a comeback.

The Dow Jones industrial average (up 139.08 to 8850.26, Charts) closed up 1.6 percent Friday, the Nasdaq composite (up 20.96 to 1595.91, Charts) rallied 1.3 percent, and the S&P 500 index (up 13.95 to 963.59, Charts) surged 1.5 percent.

"The Chicago numbers got things going this morning, and the money just poured in from the sidelines," said Bill Roe, portfolio manager at Melhado, Flynn & Associates. "The mood is upbeat and people are buying on the dips. It's really been an encouraging day."

Market breadth was decidedly positive on strong volume. More than three stocks rose on the New York Stock Exchange for every one that fell, and 1.67 billion shares traded. On the Nasdaq, eleven issues advanced for every five that declined, on volume of 2.22 billion shares.

For the week, the Dow gained 2.9 percent, the Nasdaq gained 5.7 percent, and the S&P 500 gained 3.3 percent.

Though the Nasdaq and the S&P 500 have hit new 2003 highs several times over the last month, Friday marked the first time the Dow joined the group. The Dow now stands at its best level in almost six months, the Nasdaq at its best level in almost a year and the S&P 500 at its best level in nine months.

For the month of May, the Dow gained 4.3 percent, the Nasdaq gained 8.9 percent and the S&P 500 gained 5.1 percent. All three major indexes have now closed higher for the third month in a row, the first time this has happened since the last quarter of 2001.

AOL Time Warner (AOL: up $0.37 to $15.22, Research, Estimates) climbed almost 2.5 percent after the parent of CNN/Money agreed late Thursday to settle an antitrust lawsuit against Microsoft (MSFT: up $0.21 to $24.61, Research, Estimates) in exchange for a payment of $750 million and a seven-year licensing agreement that allows AOL Time Warner to use Microsoft's Internet Explorer browsing technology.

A broad rally pushed 27 of the 30 Dow components higher. Among the gainers, Home Depot (HD: up $0.93 to $32.49, Research, Estimates) climbed just under 3 percent after it said it would buy back up to $500 million of its common stock and that it would invest around $4 billion in new stores, technology and other things later this year.

Other big gainers included Caterpillar (CAT: up $1.65 to $52.15, Research, Estimates), 3M (MMM: up $3.15 to $126.47, Research, Estimates) and Coca-Cola (KO: up $0.95 to $45.57, Research, Estimates).

Buying in a number of technology sectors, as well as biotech, lifted the Nasdaq. Computer hardware was particularly active, with the Goldman Sachs Hardware (up 5.42 to 211.75, Charts) index adding 2.6 percent after data storage maker McData (MCDT: up $2.39 to $13.47, Research, Estimates) reported a first-quarter profit versus a loss a year earlier and said its second-quarter revenue could top estimates. The stock rallied 21.6 percent, lifting sector mates Brocade Communications (BRCD: up $0.33 to $6.11, Research, Estimates) and EMC (EMC: up $0.67 to $10.82, Research, Estimates).

Stocks also gained support after the terror alert level was downgraded to "yellow," which indicates an elevated risk of a terrorist attack, from "orange," which indicates a high risk.

U.S. Treasury bonds eased amid the stock market rally. The 10-year note yielded 3.36 percent.

Light sweet crude oil futures rose 45 cents to $29.56 a barrel in New York. Gold tumbled $5.10 to $365.60 an ounce in New York.