Updated from 4:18 p.m. EDT

Hopes that the Federal Reserve will continue to slice interest rates in order to spur economic activity lifted both the Dow Jones Industrial Average and the S&P 500 to record highs Tuesday.

The Dow jumped 120.80 points, or 0.86%, to 14,164.53, and the S&P was up 12.57 points, or 0.81%, at 1565.15. The Nasdaq Composite rose 16.54 points, or 0.59%, to 2803.91.

Of the Dow's 30 components, only three finished lower. Alcoa ( AA) and American Express ( AXP) were the best performers, adding 3.7% and 3%, respectively.

The major averages surged after traders digested the minutes of the Sept. 18 Fed gathering. During that meeting, the Federal Open Market Committee cut its fed funds target rate by 50 basis points -- a bigger move than many expected -- as a measure against the liquidity problems in financial markets stemming from the subprime mess.

"Given the unusual nature of the current financial shock, participants regarded the outlook for economic activity as characterized by particularly high uncertainty, with the risks to growth skewed to the downside," the minutes read. "Some participants cited concerns that a weaker economy could lead to a further tightening of financial conditions, which in turn could reinforce the economic slowdown."

The panel also noted eased inflation concerns, saying that "the inflation situation seemed to have improved slightly and judged that it was no longer appropriate to indicate that a sustained moderation in inflation pressures had yet to be shown."

After they had a chance to consider what the minutes could mean for future rate actions, traders reacted positively and stocks were off to the races.

"There's no argument within the Fed to prevent the central bank to save the economy if it stumbles, which is a positive for the market," said Robert Pavlik, chief investment officer with Oaktree Asset Management. "The Fed's move was a response to the liquidity issue as opposed to a real weakening of the economy, which is good that growth hasn't ceased."

Shortly before the closing bell, San Francisco Fed president Janet Yellen defended the Fed's rate cut, saying that "it was important to put a substantial easing in place in September so as not to fall 'behind the curve.'"

On the other hand, St. Louis Fed President William Poole issued a stern warning earlier about the housing market and its potential recovery.

"Recent events suggest that housing will remain weak for several more quarters," said Poole in a speech. "Stabilization may not begin until well into 2008."

Only the semiconductor sector finished lower for the day. Among the winners, the Nasdaq Transportation Index and the Amex Oil Index rose 1.8%, the Philadelphia Utility Index added 1.4%, and the NYSE Financial Index ended up 0.7%.

Breadth was positive. On the New York Stock Exchange 2.89 billion shares changed hands, as advancers topped decliners by a 2-to-1 margin. Volume on the Nasdaq reached 1.90 billion shares, with winners outpacing losers nearly 3 to 2.

Traders were also preparing for the earnings flood, with Alcoa set to kick off the reporting season. The Dow component is due to report after the closing bell, with Wall Street expecting a profit of 65 cents a share.

Following the prior close, fast-food chain operator Yum! Brands ( YUM) posted a third-quarter profit that topped the Thomson First Call average estimate. Yum! also upped its full-year guidance. Shares gained $1.82, or 5%, to $38.11.

Much like the previous session, Google ( GOOG) lead technology shares higher, having topped the $600 level for the first time Monday. Helping the stock this time was a decision by Bank of America Securities to raise its price target to $670 from $620. Google rose $5.56, or 0.9%, to end at $615.18.

Bank of America also raised its price target for Amazon.com ( AMZN) to $105 from $90. However, shares ended 53 cents, or 0.6%, lower at $95.32.

"Investors can't stop talking about technology being the new leadership group," said Marc Pado, U.S. market strategist with Cantor Fitzgerald. "Actually, tech turned the corner several months ago, but is only now really getting Wall Street's attention. Being overbought has been no obstacle for the group."

Among other analyst actions, Deutsche Securities downgraded Coca-Cola ( KO) and PepsiCo ( PEP) to hold from buy, citing valuation for both. Coke inched 0.1% higher to $57.88, while Pepsi finished 1% lower at $73.21.

Meanwhile, Calyon initiated coverage of GM ( GM) and Ford ( F) with reduce ratings, while Goldman boosted its earnings estimates for the next three years on Microsoft ( MSFT).

Ford added 1.6% to $8.32, GM tacked on 0.6% to $38.33, and Microsoft rose 0.9% to $30.10.

In other corporate news, SLM Corp. ( SLM), better known as Sallie Mae, has sued to compel a group that includes private-equity firm J.C. Flowers, JPMorgan ( JPM) and Bank of America ( BAC) to close a buyout deal for the education lender. SLM lost 71 cents, or 1.4%, to $48.50.

Also after the last close, Sprint Nextel ( S) said that CEO Gary Forsee will step down immediately. The stock slipped 22 cents, or 1.2%, to $18.28.

Commodities finished with gains. Crude oil finished up $1.24 to $80.26 a barrel. Gold climbed $4.60 to $737.40 an ounce, and silver added 23 cents to $13.59 an ounce.

U.S. Treasury prices were mostly lower following the Fed minutes, but the 30-year bond was adding 3/32, yielding 4.86%. The 10-year lost 4/32 to yield 4.65%.

European bourses were solidly higher. London's FTSE 100 rose 1.1%, and Germany's Xetra Dax and the Paris CAC 40 were slightly higher. Overnight in Asia, Hong Kong's Hang Seng jumped 1.7% , and Japan's Nikkei 225 Index added 0.6%.

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