NEW YORK (CNNMoney) -- Stocks surged in morning trading after the latest reading on U.S. economic growth came in much stronger than expected, but retraced some of the gains as the session progressed.
Investors took the latest jobless claims report, which showed initial unemployment claims at their lowest level since April, as a sign to jump back into the stock market.
U.S. stocks were already poised for a positive start after Germany's parliament approved new powers for the eurozone's bailout fund. Europe's debt crisis has kept investors on edge for months.
"The expectations priced into the stock market right now are so exceedingly low," said Paul Larson, equities strategist at Morningstar. "If we somehow manage to avoid the double dip recession, stocks will have been a real bargain."
The Dow Jones industrial average rallied 151 points, or 1.3%. The S&P 500 jumped 9 points, or 0.8% in early trading, while the Nasdaq Composite fell 3 points, or 0.2%.
Investors jumped into financial stocks, which were some of the morning's biggest winners. Morgan Stanley, JPMorgan Chase, Bank of America, Goldman Sachs, and Citigroup were all up between 1% and 3% by late morning.
Markets reacted positively to better-than-expected news on the U.S. economy, including the latest government report on gross domestic product. The U.S. economy grew at a 1.3% annual rate in the second quarter, more quickly than expected, according to GDP, the broadest measure of the nation's economic activity. GDP jumped from the previous reading of a 1% rise.
Meanwhile, the number of Americans filing for unemployment benefits last week dropped by 37,000 to 391,000. That reading came in much better than economists had the 419,000 claims they ha d predicted.
Investors continue to watch any and all developments in Europe. Germany became the latest of the 17 countries in the eurozone to approve an overhaul of the European Financial Stability Facility, a bailout fund set up in the wake of the 2008 financial crisis.
Investors were expecting Germany to approve the measure. Stock futures rose well in advance of the vote, and then their upward momentum slowed after it passed.
"The market has been under so much pressure recently, it seems like rallies are somewhat limited at this point until the wheels are in motion on this bailout," said Phil Streible, senior market strategist at MF Global.
On Wednesday, stocks closed down, ending a three-day winning streak for all three indexes.
Economy: A report from the National Association of Realtors showed pending home sales down 1.2% in August.
Companies: Shares of Nokia rose after the phone-maker said it will cut another 3,500 jobs in 2012 to reduce costs.
AMD shares fell after the chipmaker cautioned investors it forecasts slower revenue growth in the third quarter than originally expected.
World markets: European stocks were mixed in late afternoon trading. Britain's FTSE 100 fell 0.7%, while the DAX in Germany jumped 0.7% and France's CAC 40 moved up 0.3%.
Asian markets ended mixed. China's Shanghai Composite fell 1.1%, while Japan's Nikkei rose 1%. Hong Kong was closed due to a typhoon.
Currencies and commodities: The dollar fell against the euro and the Japanese yen, but rose against the British pound.
Oil for November delivery gained $1.23 to $82.44 a barrel.
Gold futures for December delivery fell 60 cents to $1,617.10 an ounce.
Bonds: The price on the benchmark 10-year U.S. Treasury fell, pushing the yield up to 2.02%.
