The advance capped a third week of gains for the indexes. The Dow and S&P both held firmly above key psychological levels (15,000 and 1,600 respectively).
Still, investors were largely focused on the foreign exchange market, where the U.S. dollar has been on a tear versus the Japanese yen and other currencies.
"We're watching the strengthening dollar because that tends to be a good indicator of equity moves," said Art Hogan, managing director at Lazard Capital Markets.
Much of the action Friday was in Tokyo. Japan's Nikkei surged 3% to a five-year high as the yen continued to weaken against the U.S. dollar, which rose to ¥101 one day after hitting ¥100 for the first time in four years.
Currency war? The yen is down 15% against the greenback so far this year as the Bank of Japan is on a mission to beat deflation by pumping money into the economy. But traders said the latest move has more to do with a strong dollar than a weak yen. The dollar has been boosted recently by signs of strength in the U.S. job market and interest rate cuts from a parade of central banks.
Speaking of central bank intervention, Federal Reserve Chairman Ben Bernanke said after a speech in Chicago that the central bank is keeping an eye out for bubbles in the financial system, but he did not address the central bank's controversial asset purchasing program.
Meanwhile, finance officials from the world's top seven economic powers are meeting near London Friday for talks on the global economy. The G7 ministers are expected to reaffirm their previous statement that they are focused on boosting growth, while also refraining from "competitive devaluation," the technical term for a currency war.
Afraid to bail on the bull. There were few major corporate or economic reports to drive stocks Friday. Investor sentiment is "cautiously optimistic," said David Madden, market analyst at IG Markets in London.
"Nobody wants to buy at the top, but given how anxiously central banks will push things, nobody's willing to take money off the table at the same time," he said.
All three major indexes are up between 13% and 15% so far this year.
The rally has been led by the more defensive sectors of the market, including consumer staples and utilities.
But investors are now starting to rotate into shares of companies that are more sensitive to the economic cycle, such as the industrial names, said Lazard's Hogan.
The market is still "relatively well valued," he said, but it's too soon to say how the trend will play out. "It's less about risk tolerance than it is about how stretched the defensive trade has gotten," he noted.
Tesla, which is a big target of short sellers, is likely benefiting from a massive squeeze as investors who bet against the stock rush to buy it back before it goes even higher.
A bidding war is brewing over Dell(DELL). Activist investor Carl Icahn and Southeastern Asset Management sent an alternative buyout offer to the PC maker. Icahn also disclosed a 4.52% stake in Dell. The move is a challenge to the offer Michael Dell announced in January.
The Gap is cool again?
Priceline(PCLN) shares rose even though the online travel booker issued a worse-than-expected forecast for second-quarter earnings. Results for the first quarter did top estimates.
Gap(GPS) shares rose more than 5% after the apparel retailer issued strong quarterly guidance.