Wall Street stages a comeback

NEW YORK (CNNMoney.com) -- Stocks closed higher Tuesday, recovering from steep loses earlier in the session, as investors looked forward to earnings from Apple and speculated about possible moves by the Federal Reserve.

The Dow Jones industrial average (INDU) rose 75 points, or 0.7%. The S&P 500 (SPX) index rose 12 points, or 1%, and the Nasdaq (COMP) composite gained 24 points, or 1%.

Stocks plunged at the open and struggled for most of the morning as investors digested a big drop in quarterly earnings from Goldman Sachs and a lower profit outlook from Johnson & Johnson. Weaker-than-expected revenues from IBM also weighed on the market.

But the tone improved in the afternoon on chatter that the Fed is considering additional steps to encourage bank lending. Ben Bernanke, chairman of the U.S. central bank, is scheduled to testify before Congress on Wednesday.

"That's all speculation," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams. "I think it's more Apple and Goldman rallying and taking the market up with it."

Shortly after the market closed, Apple (APPL) reported its best quarterly results on record due to strong Macintosh sales and overwhelming demand for its iPad device.

Apple said sales rose to a record $15.7 billion in the most recent quarter, up 61% from the same period last year. Net income rose to $3.25 billion, up 78% from a year ago.

Shares of Apple continued to rally, gaining 4% in extended trading.

Also after the close, Yahoo (YHOO, Fortune 500) said its second-quarter net income rose 51% versus the same period last year. The Internet company said sales rose 2% to $1.6 billion, which beat analysts' forecast of $1.16 billion. But shares fell nearly 5% in extended trading.

Investors have been focused on quarterly results, with over 120 companies due to report this week.

While earnings have been relatively strong so far, investors are looking for sales and revenue growth to confirm that profits are due to improved economic conditions and not cost-cutting measures.

Concerns that the U.S. economy could dip back into recession later this year have kept the market range-bound since April. A dour report released Tuesday on initial construction of new homes in June added to the economic jitters.

"People are very concerned about growth in the second half," said Ryan Larson, head of U.S. equity trading at RBC Capital Markets. "That's going to be key to sustaining any rally coming out of earnings season."

Stocks ended Monday's session with gains, although economic worries tempered positive earnings results.

Companies: After the market closed, BP (BP) announced plans to sell $7 billion worth of assets to Apache Corp. The sale of assets in the United States, Canada and Egypt is part of a plan to raise money to cover costs related to the oil spill in the Gulf of Mexico.

Goldman Sachs (GS, Fortune 500) said profit fell 82% in the second quarter to $613 million, due to a slowdown in the bank's trading business. Results were also hurt by a bonus tax in the United Kingdom and the $550 million settlement Goldman reached with the Securities and Exchange Commission. Shares gained about 2%.

Drugmaker Johnson & Johnson (JNJ, Fortune 500) fell more than 2% after the company lowered its full-year earnings estimate to a range between $4.65 to $4.75 a share, compared with earlier guidance of $4.80 to $4.90 a share.

For the second quarter, J&J said it earnings rose 7% to $1.23 a share from $1.15 a share in the same period last year.

J&J also said it has received a grand jury subpoena and is cooperating with a federal investigation stemming from multiple recalls of its popular non-prescription drugs.

Harley-Davidson (HOG, Fortune 500) soared over 13% after the motorcycle maker said it earned 59 cents a share, versus expectations for 41 cents a share.

Shares of Toyota (TM) fell 1.4% after the automaker said it was cooperating with a subpoena from a U.S. federal grand jury for documents related to steering problems in its vehicles.

IBM (IBM, Fortune 500) fell 2.5% after the company reported late Monday second-quarter earnings that beat expectations, while sales growth was weaker than expected.

Economy: Housing starts fell to their lowest level of the year in June, down 5% to an annual rate of 549,000. But building permits showed surprising strength, climbing 2.1% to an annual rate of 586,000.

Economists surveyed by Briefing.com had expected starts to come in at an annual rate of 575,000, according to consensus estimates. Building permits were forecast have dipped to an annual rate of 572,000.

Separately, a monthly report from the Labor Department showed that unemployment eased in more than half of U.S. states in June.

A total of 39 states and the District of Columbia posted unemployment rate decreases in June, while jobless rates rose in five states and remained unchanged in six states.

World markets: European shares ended lower. The FTSE 100 in Britain lost 0.2%, France's CAC 40 slid 0.5% and Germany's DAX fell 0.7%.

Asian markets ended mixed. The Shanghai Composite rallied 2.2% but Japan's Nikkei tumbled 1.2%. The Hang Seng in Hong Kong added 0.9%.

Dollar and commodities: The dollar was up against the euro, the British pound and the Japanese yen.

U.S. light crude oil for August delivery edged up 78 cents to settle at $75.53 a barrel. The September contract, which becomes active Wednesday, rose 85 cents to $77.75 a barrel.

COMEX gold's August contract rose $10 to $1,192.20 per ounce.

Bonds: Treasury prices rose, pushing the yield on the 10-year note down to 2.93% from 2.96% late Monday. Bond prices and yields move in opposite directions.

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