NEW YORK — Wall Street stormed higher Tuesday as investors, optimistic following stronger-than-expected earnings from two big investment banks, were also galvanized by the Federal Reserve’s decision to cut interest rates by three-quarters of a percentage point. The Dow Jones industrial average soared 420 points, its biggest one-day point gain in more than five years.
Many investors were expecting the Fed to cut rates a full point but appeared to overcome their early disappointment, especially since a 0.75 point cut is still substantial. The central bank’s benchmark fed funds rate is now at 2.25 percent — its lowest level since December 2004, and less than half what it was last summer.
The Fed began lowering rates six months ago, after the credit markets seized up because of soaring defaults in subprime mortgages.
In its statement accompanying the rate decision, the Fed said “recent information indicates that the outlook for economic activity has weakened further” and also that “uncertainty about the inflation outlook has increased.”
Quarterly results from Leh man Brothers Inc. and Goldman Sachs Group Inc. gave great comfort to a market fearful about investment banks weakening further. Both Lehman and Goldman posted quarterly profits early Tuesday that were significantly lower than they were a year ago but higher than analysts predicted.
“The overwhelming news this morning was the Lehman and Goldman Sachs earnings,” said Jim Herrick, director of equity trading at Baird & Co. “The earnings this morning allayed investors’ fears that there’s going to be a hard collapse.”
Still, while Wall Street’s advance was heartening, investors were well aware that over the past six months, stocks have had many bursts higher, only to give them back at the first sign of credit market or economic trouble.
It will take time before anyone knows whether the market is back on a true upward track or is just staging another bear-market rally.
The Dow closed up 420.41, or 3.51 percent, at 12,392.66. The Dow’s point gain was the largest point jump for the Dow since a 447-point advance on July 29, 2002, when Wall Street was also struggling with a protracted decline.
Broader stock indicators also finished sharply higher. The Standard & Poor’s 500 index rose 54.14, or 4.24 percent, at 1,330.74, and the Nasdaq composite index rose 91.25, or 4.19 percent, to 2,268.26, the steepest percentage gain for the tech-heavy index in five years.
Bond prices fell. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.50 percent, from 3.30 percent Friday.
