NEW YORK (CNNfn) - Wall Street's solid rally cooled off somewhat in afternoon trading Friday, but stocks maintained hefty gains scored in the wake of an unexpected but celebrated interest-rate cut the previous day.
Shortly before 1:30 p.m. the Dow Jones industrial average was 89.60 points, or 1.1 percent, higher at 8,388.96. On the New York Stock Exchange, advances beat declines 1,981 to 1,034 on trading volume of 676 million shares.
The Nasdaq Composite rose 7.03 to 1,618.04 and the S&P 500 index gained 4.14 to 1,051.63. The Russell 2000 index of small-cap stocks climbed 5.83, or 1.7 percent, to 340.67.
In a highly unusual move, the Federal Reserve Thursday lowered the two key interest rates it controls -- the Fed funds rate and the discount rate -- by a quarter of a percentage point. The move, coming in between Fed policy meetings, sent a strong signal to financial markets that the central bank has rolled up its sleeves to protect the U.S. economy from slipping into a recession.
The Fed's unexpected gift to the market lifted the Dow industrials more than 330 points Thursday and led to rallies in European, Asian and Latin American stock markets. Canada and Argentina followed with rate cuts of their own, and speculation rose that European central banks may also come under pressure to ease.
The bond market recovered and headed higher. The benchmark 30-year Treasury bond rose 10/32 of a point in price, lowering the yield to 4.94 percent.
The dollar weakened against the German mark and the Japanese yen overnight, but found some buyers in U.S. trading. Lower interest rates decrease the value of the dollar, but a weaker dollar can help economic growth by stimulating exports.
The party isn't over yet
In the stock market, still giddy from Thursday's dizzying rally, investors rushed back in for more. But the morning rally lost some steam later in the day as investors stepped in to take profits on the gains.
Even in the wake of the Fed rate cut, companies that reported earnings were once again the day's leading newsmakers.
Among the positive surprises, shares of Tellabs (TLAB) surged 4-13/16, or more than 12 percent, to 43-9/16 after the company reported a third-quarter profit of 45 cents a share, up from 34 cents a year earlier.
Also among the gainers, Internet search engine Excite (XCIT) climbed 1-1/8 to 33-7/8 after the company late Thursday reported its first quarterly operating profit, as well as rising revenue and Web traffic.
But shares of BMC Software (BMCS) tumbled 10-5/16, or more than 21 percent, to 38-9/16 even after the company reported third-quarter operating earnings that beat estimates. Instead of the positive earnings news, investors focused on a Prudential Securities downgrade of the stock to "accumulate" from "strong buy." BMC was the second-most active Nasdaq stock and the leading net loser on the exchange.
And pharmaceutical giant Merck (MRK), which fell in the morning, later bounced back and rose 1-7/8 to 135-1/8 as investors warmed up to the company's strong third-quarter earnings.
Elsewhere, interest-rate sensitive financial stocks were among the most active, but their performance was mixed. Shares of Dow component Citicorp (CCI) rose 1-9/16 to 41-3/8 and Chase Manhattan (CMB) climbed 1-15/16 to 48-15/16. But another Dow member, J.P. Morgan (JPM) lost 1-1/2 to 90-3/4 and Bankers Trust (BT) tumbled 4-3/8, or nearly 8 percent, to 52-1/2. BT's investment arm, BT Alex. Brown, closed its European emerging-markets equities desk, cutting about 12 jobs.
Finally, airline stocks continued to power ahead, building on the sector's spectacular gains Thursday. Shares of Delta Air Lines (DAL), which Thursday reported strong fiscal first-quarter results, rallied 3-1/8 to 96-5/8. American Airlines parent AMR (AMR) climbed 1-13/16 to 56-5/16, and United Airlines parent UAL (UAL) rose 13/16 to 65-13/16. Fresh from a nearly 7 percent gain Thursday, the Dow transports index surged 88.86, or 3.3 percent, to 2,753.14. 
-- by staff writer Malina Poshtova Zang
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