NEW YORK (CNN/Money) - Stocks rallied to close higher Monday, bringing the major indexes to levels not seen in about a year, as investors cheered a surprisingly positive report on manufacturing activity in New York State as a sign of better times to come.

The New York Fed's index for manufacturing activity in the state came in at a surprising 26.8 for June, more than triple what economists had forecast and more than double May's reading of 10.6.

The Nasdaq composite (up 40.09 to 1666.58, Charts) led the major indexes in gains, jumping 2.5 percent. The Dow Jones industrial average (up 201.84 to 9318.96, Charts) closed the day up about 2.2 percent, breaking 9,300 for the first time since July 5, 2002. All but one of the 30 Dow stocks rose.

The S&P 500 index (up 22.13 to 1010.74, Charts) also scored a gain of more than 2.2 percent, closing above 1,000 for the first time since June 20, 2002.

"People seem to be coming to the realization that the economy might, in fact, pick up in the second half," said Jack Baker, head of equities at Putnam Lovell Securities. "I don't see any negatives in the near term to derail this market."

Stocks have rallied over the past three months on the belief that the economy is bound to bounce back in the second half of the year. Most economic reports, however, have indicated that growth remains tepid and the labor market is still contracting. But Wall Streeters have stubbornly ignored the data, finding silver linings in every bit of bad news that has come the market's way and turning whatever good news there has been into hefty gains for stocks.

"I think this New York manufacturing report was encouraging," said Douglas Altabef, managing director at Matrix Asset Advisors. "There is very likely to be continued ebb and flow depending on the 'news du jour.' But, clearly, any favorable economic news is going to have a positive effect on the market."

Traders said they were looking ahead to the Federal Reserve's decision on interest rates at its two-day meeting beginning June 24. Most are anticipating a rate cut and say that if the Fed holds rates steady, or cuts back more than a quarter or a half percentage point, it could be taken negatively by investors.

The market also is entering corporate warning season, ahead of the close of the second quarter. Traders said investors will be paying close attention to which, and how many, companies lower their earnings estimates.

Retailers Circuit City (CC: up $0.12 to $6.87, Research, Estimates) and Pier 1 Imports (PIR: up $0.19 to $21.05, Research, Estimates) are among the companies set to report results Tuesday.

Some economic reports were also among events likely to impact the market Tuesday. The government plans to release its reading on consumer prices for May ahead of the opening bell, expected to have slipped 0.1 percent following a 0.3 percent drop in April, according to a survey of economists by Briefing.com. Economists, on average, expect core prices (which exclude food and energy) to have risen 0.1 percent from a flat reading in April.

Investors also will get a reading on housing for May, with starts expected to have risen, while building permits are forecasted to have dipped slightly.

Also before the start of trading, the government plans to release its reading on industrial production for May, which Wall Street forecasted, on average, to come in flat after a 0.5 percent decline in April.

A few upbeat pieces of corporate news supported the market's climb Monday.

Yahoo! (YHOO: up $1.94 to $30.66, Research, Estimates) jumped 6.8 percent after SoundView Technologies upgraded the stock to "outperform" from "neutral."

Pouring a bit of cold water on the tech stock rally, Lehman Brothers downgraded the sector to "neutral" from "overweight," saying earnings revisions have run well ahead of those for the rest of the market.

But that didn't stop J.D. Edwards' (JDEC: up $0.74 to $13.77, Research, Estimates) stock from climbing 5.7 percent after PeopleSoft (PSFT: down $0.17 to $16.75, Research, Estimates) reaffirmed its commitment to a merger with the company and increased its offering price. PeopleSoft, which originally made its offer of $14.10 a share on June 2, said Monday it would offer $14.33 for each Edwards share -- totaling about $1.75 billion.

About a week after PeopleSoft announced the J.D. Edwards deal, Oracle (ORCL: up $0.17 to $13.65, Research, Estimates) made an unwelcome $5.1 billion offer to buy PeopleSoft, a deal which, if it is completed, will likely derail the J.D. Edwards acquisition.

Elsewhere in the market, Pfizer (PFE: up $1.52 to $34.60, Research, Estimates) gained 4.6 percent after the company said its cholesterol-lowering drug, Lipitor, significantly reduced strokes and heart attacks in patients with Type II diabetes, which prompted the company to halt its trials early.

Caterpillar (CAT: up $1.84 to $57.89, Research, Estimates) was one of the Dow 30's leading gainers, up 3.3 percent, after Credit Suisse First Boston raised its target price on the stock to $65 from $59.

Fellow Dow component Boeing (BA: up $1.07 to $36.41, Research, Estimates) also fed into the rally. Shares of the aircraft maker rose 3 percent after its head of commercial jets said Saturday that global airline traffic is likely to pick up this year. The American Stocks Exchange's airline index rose more than 2.5 percent Monday.

Shares of American Express (AXP: up $1.16 to $44.59, Research, Estimates), also a Dow 30 member, jumped 2.7 percent after it said it would acquire U.K.-based Threadneedle Asset Management Holding for about $570 million.

Market breadth was positive. On the New York Stock Exchange, advancing issues outnumbered decliners by nearly three to one as 1.3 billion shares changed hands. On the Nasdaq, where volume stood at 1.9 billion shares, gainers held a nearly two-to-one lead over losers.

Bond yields tipped higher on the strength in stocks, with the 10-year Treasury note yielding 3.18 percent as its price dropped 20/32 of a point. The dollar was slightly higher against the yen and the euro.

European stock markets closed higher Monday, while Asian stocks finished their overnight session mixed.

Light sweet crude oil futures rose 24 cents to $29.57 a barrel in New York, where gold climbed $2.50 to $359.70 an ounce.