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NEW YORK (CNNMoney.com) -- Stocks surged Monday, as investors took the morning's weak new home sales report and mixed earnings news as further evidence that the Federal Reserve will keep cutting interest rates.

The Dow Jones industrial average (INDU) added 1.4%. The broader Standard & Poor's 500 (SPX) index added 1.8% and the Nasdaq composite (COMP) gained 1%.

Stocks slumped Friday, as investors backtracked after a two-session rally that had brought some relief after a miserable start to the year. After a slow start Monday, stocks turned higher again.

"I think the market got short-term oversold and so you're seeing a natural rebound today," said Robert Loest, portfolio manager at Integrity Funds.

The advance was broad-based, with 27 out of 30 Dow issues rising, led by Citigroup (C, Fortune 500), Merck (MRK, Fortune 500), Caterpillar (CAT, Fortune 500) and JP Morgan (JPM, Fortune 500).

A notable decliner was McDonald's (MCD, Fortune 500), which dipped as investors expressed disappointment about its slowing U.S. sales, amid a broader consumer spending slowdown. (Full story).

After the close Monday, American Express (AXP, Fortune 500) reported lower earnings that met estimates on higher revenue that missed estimates, sending shares lower in after-hours trading.

Fellow Dow component 3M (MMM, Fortune 500) reports earnings Tuesday morning.

Loest said that gains could be sustainable for a few more sessions, but could easily disappear based on the news expected later this week.

A busy week on Wall Street brings a two-day Federal Reserve meeting, as well as reports on durable goods orders, fourth-quarter GDP growth, personal income and spending, manufacturing and the labor market.

The first economic report of the week was pretty dismal.

New home sales fell to a 604,000 annualized rate in December, the government reported Monday. The report missed forecasts, fell from the previous month and reflected the continued collapse of the housing market. The 2007 drop in new home sales was the worst on record. (Full story).

However, the lousy report may have added to bets that the Federal Reserve will have to keep cutting interest rates, something the stock market has signaled it would prefer.

Tough start to the year. Stocks tumbled through most of January on worries that the housing and credit market crises would send the economy into a recession, if it isn't there already.

To address the risks, last week the U.S. government announced a $150 million fiscal stimulus plan that would bring tax relief to millions of Americans. Meanwhile, the Federal Reserve announced an emergency interest-rate cut, ahead of its regularly scheduled meeting this week.

The Fed cut the fed funds rate, a key short-term interest rate, by three-quarters of a percentage point, to 3.50%. Investors are hoping that the Fed will cut rates by as much as another half-percentage point at the conclusion of its two-day meeting on Wednesday.

"If they don't cut by a half-percentage point, there's going to be a lot of disappointment," Loest said.

Earnings news. McDonald's (MCD, Fortune 500) reported quarterly sales and earnings that rose from a year ago and topped estimates. The company said global sales at stores open a year or more, or same-store sales, grew in December, while U.S. same-store sales were flat. Shares slumped 5.6% on the same-store sales forecast.

Verizon Communications (VZ, Fortune 500) reported higher quarterly earnings that matched estimates on higher quarterly revenue that missed estimates. Shares of the Dow component ended higher after slipping throughout the session.

Corning (GLW, Fortune 500) reported higher quarterly sales and earnings that topped expectations, thanks to stronger demand for glass used in flat-screen televisions and computers. Shares gained 3.3%.

In other news, Blackstone Group's deal to buy Alliance Data Systems for $6.4 billion could be in trouble due to what the company said were unprecedented regulatory demands. Shares of ADS (ADS) plunged 35% in active New York Stock Exchange trading. Blackstone shares lost less than 1%.

Market breadth was positive. On the New York Stock Exchange, winners topped losers by over three to one on volume of 1.64 billion shares. On the Nasdaq, advancers beat decliners by almost two to one on volume of 2.07 billion shares.

Other markets. Treasury prices slipped, raising the yield on the 10-year note to 3.58% from 3.56% late Friday. Bond prices and yields move in opposite directions.

In currency trading, the dollar inched higher versus the yen and fell versus the euro.

U.S. light crude oil for March delivery rose 28 cents to settle at $90.99 a barrel on the New York Mercantile Exchange.

COMEX gold rallied $16.60 to settle at $927.10 an ounce, after touching an all-time high of $929.50 earlier.