July 16 (Bloomberg) -- U.S. stocks rallied after higher- than-estimated profit at Wells Fargo & Co. sparked the biggest- ever gain in financial shares and a two-day tumble in oil prices brightened the outlook for transportation companies.

Wells Fargo, which avoided the worst of the fallout from the subprime mortgage market's collapse, jumped the most since at least 1980, leading Citigroup Inc., JPMorgan Chase & Co. and Bank of America Corp. higher. United Parcel Service Inc. and Dillard's Inc. climbed as the two-day retreat in crude overshadowed a government report showing the fastest increase in consumer prices since 2005. The Standard & Poor's 500 Financials Index surged 12 percent as every bank rose at least 10 percent. The Amex Airline Index advanced a record 18 percent.

The S&P 500 added 30.45 points, or 2.5 percent, to 1,245.36, rebounding from its lowest level since 2005 with its steepest gain since April. The Dow Jones Industrial Average climbed 276.74, or 2.5 percent, to 11,239.28, while the Nasdaq Composite Index increased 69.14, or 3.1 percent, to 2,284.85. Four stocks rose for each that fell on the New York Stock Exchange.

``It was really quite an extraordinary rally,'' said John Carey, a Boston-based money manager at Pioneer Investment Management, which oversees about $300 billion. ``There was panic buying. A lot of people have been quite underweight the financials, and yet they remain an important part of the market. If there's a sense they're going to move higher, you have a lot of people coming in to buy all the names at the same time.''

Financial shares rebounded from their steepest five-day loss ever, pushed higher by an increased dividend at Wells Fargo and a Securities and Exchange Commission plan to limit traders' ability to bet that shares of Fannie Mae, Freddie Mac and some of the nation's largest banks and securities firms will decline.

Earnings Watch

Profits have slipped only 0.8 percent on average for the 26 companies in the S&P 500 that have reported second-quarter results so far, according to data compiled by Bloomberg. Earnings for all companies in the index are forecast to drop 14 percent on average, according to an analyst survey July 11. The quarter is expected to cap a full year of declining earnings, the longest profit slump since 2002.

Wells Fargo rallied $6.72, or 33 percent, to $27.23 for the steepest advance in the S&P 500. Gains in credit card fees and insurance revenue softened the blow from bad home loans. Net income slumped 23 percent to $1.75 billion, or 53 cents a share. That beat the 50-cent average estimate of 21 analysts surveyed by Bloomberg. Revenue rose 16 percent to a record $11.5 billion and the bank boosted its dividend by 10 percent.

Chief Executive Officer John Stumpf has kept Wells Fargo profitable by avoiding the riskiest mortgages that led to losses at Citigroup Inc., Wachovia Corp. and Washington Mutual.

Transports Rally

UPS, the largest package delivery company, climbed $2.70 to $59.14, helping the S&P 500 Transportation Index rise 5.1 percent as all 10 companies in the group advanced.

Dillard's, the Arkansas-based department-store chain, rallied $1.05, or 13 percent, to $9.30. Retailers in the S&P 500 rose 5.5 percent as a group, their steepest advance since April.

Financial shares led the market's advance for the entire day, even after consumer and transportation shares extended gains as the price of oil extended its two-day retreat to more than $10 a barrel on a government report showing an unexpected increase in inventories.

Traders said the market probably added to gains as investors bought shares to cover bets that stocks would decline further.

``There may have been some short covering,'' said Pioneer Investment's Carey.

Airlines Surge

Airline stocks surged after American Airlines parent AMR Corp. and Delta Air Lines Inc. expanded plans to scale back on flights and posted operating results beat analysts' estimates.

AMR rose the most since April 2003, climbing 32 percent to $5.82. Delta posted its steepest gain since emerging from bankruptcy in April 2007, surging 27 percent to $5.91. UAL Corp.'s United Airlines, the world's second-largest carrier, increased 42 percent to $4.43.

Crude oil for August delivery declined $4.14, or 3 percent, to $134.60 a barrel in New York after retreating $6.44 yesterday.

``If you start to see oil break and if it can get to breathable levels like $100 a barrel and banks iron out their problems, then this market is going to run,'' said Frank Ingarra, the assistant portfolio manager at Hennessy Advisors Inc., which oversees $1.1 billion in Novato, California.

The decline in energy prices offset a government report that showed consumer inflation quickened faster than analysts estimated in June. The cost of living soared 1.1 percent last month, the Labor Department said. Excluding food and energy, so- called core prices climbed 0.3 percent, also more than anticipated.

Banks Rebound

Wells Fargo led the S&P 500 Financials Index to its first gain in six days, as 87 of its 89 companies increased.

Financial stocks with the biggest losses in the past week were among the shares with the steepest gains today following Wells Fargo's profit report.

Washington Mutual Inc., the largest U.S. savings and loan, surged 25 percent to $4.53. The advance pared the stock's drop over the past five days to 23 percent.

JPMorgan, the third-largest U.S. bank by assets, climbed $4.92, or 16 percent, to $35.94. Bank of America, the No. 2, added $4.15, or 22 percent, to $22.67. Citigroup, the biggest, climbed 13 percent to $16.47.

`Markets Calm Down'

``The fact that Wells is a huge mortgage underwriter and servicer and their numbers came out better than expected really helps the market calm down,'' said Malcolm Polley, who helps oversee about $1 billion as president and chief investment officer at Stewart Capital Advisors in Pittsburgh.

Fannie Mae rose 31 percent to $9.25 and Freddie Mac surged 30 percent to $6.83. Fannie Mae tumbled 27 percent yesterday for its steepest slump since at least July 1980 and Freddie Mac plunged 26 percent as investors lost confidence in the government's plan to rescue the largest U.S. mortgage-finance company.

SEC Chairman Christopher Cox yesterday told the Senate Banking Committee that the regulator would limit a type of trade in which investors bet against Fannie Mae, Freddie Mac and some of the nation's largest banks and brokerages. Cox said the SEC will require traders to hold shares before shorting 17 brokerages and the two government-sponsored mortgage buyers.

The SEC is concerned about abuses in so-called naked short- selling, in which traders sell the shares short without actually holding the stock, and the ``potential for maliciously manufactured false information,'' Cox told CNBC today. Legitimate short selling ``is vital to the functioning of our markets,'' Cox added.

Schwab Rallies

Charles Schwab Corp. had the biggest gain since 2001, climbing 14 percent to $21.96. The largest U.S. online brokerage reported quarterly profit from continuing operations above the average analyst estimate as an influx of customer assets helped buoy revenue amid a decline in equity markets.

Intel Corp. rose $1.01 to $21.78. Third-quarter sales will be $10 billion to $10.6 billion, the company said yesterday. That compares with an average prediction of $10 billion in a Bloomberg survey of analysts. Computer-processor sales remain strong worldwide, with no signs of the U.S. economy sapping demand, according to Chief Financial Officer Stacy Smith.

Target Corp. gained for the first time in six days, climbing 5.7 percent to $46.18. Investor William Ackman put more cash into the $2 billion hedge fund he started to invest in Target as shares of the second-largest U.S. discount retailer declined 38 percent in the past year, according to two people with knowledge of the matter.

Energy Shares Drop

Energy stocks had the steepest decline among 10 industries in the S&P 500, dropping 2.5 percent, after a surprise increase in oil inventories signaled the slowing U.S. economy diminished energy demand.

Exxon Mobil Corp., the world's largest oil company, fell 1.7 percent to $80.81. Chesapeake Energy Corp., the second-biggest U.S. independent natural-gas producer, slumped 4.7 percent to $56.67.

About $14 trillion has been wiped off the value of global equities since October, with the S&P 500 falling into a bear market last week, as $417 billion in credit-related losses prolong the global economy's slump and rising commodity prices stoke inflation.

Bearish Sentiment

Among the 23 industrialized nations in the MSCI World Index, only Canada averted a bear-market decline of 20 percent. Financial institutions and consumer companies dependent on discretionary spending led the world's retreat in 2008, losing 29 percent and 20 percent.

The global bear market in equities will deepen from New York to London to Tokyo in the next six months as credit losses prolong the economy's slump and inflation erodes profits, a survey of Bloomberg users showed.

The S&P 500, the U.K.'s FTSE 100 Index, Japan's Nikkei 225 Stock Average, Spain's IBEX 35 Index, the Swiss Market Index, France's CAC 40 Index, Italy's S&P/MIB Index and Germany's DAX Index will decline, according to the Bloomberg Professional Global Confidence Survey of 4,232 users taken July 7 to 11. In Brazil, the only market where investors predict gains, optimism dropped to a five-month low, the survey showed.

The S&P 500 has slumped 20 percent since its Oct. 9 record. Financial shares in the measure capped the steepest-ever five-day decline yesterday, with Citigroup Inc., the biggest U.S. bank, plunging to the lowest level since it was created through an October 1998 merger.

The S&P 500 now trades for about 20.6 times the reported earnings of companies in the index, while the MSCI World Index, excluding the U.S., is valued at 11.8 times profit. When the gap between their price-to-earnings ratios widened to 9.89 in May, the rest of the world hadn't been that much cheaper than the U.S. since 2002.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

Last Updated: July 16, 2008 17:03 EDT