Stocks Rebound Sharply; S&P 500, Nasdaq Rise Over 1%

On Tuesday, the ISM Non-Manufacturing Index showed a decline to an as- forecast 55.2% in January from a downwardly revised 55.7% in December, indicating continued growth at a slightly slower rate in the U.S. services sector. The employment index in the non-manufacturing ISM report increased 2.2 percentage points to 57.5%, indicating growth in employment for the sixth straight month.

"Despite the decline in the month, the January services sector reading is still a positive one; however, the strength, particularly in the employment component, seems a bit out of touch with the hard data, as the improvement in the non-manufacturing sector employment has been much less impressive as of late than would be implied by the survey," said Yelena Shulyatyeva, a U.S. economist at BNP Paribas.

Survey respondents expressed a measuredly optimistic view on the business climate, with one in the retail trade saying that there seems to be "some stabilization in recent months. Business seems a little more confident, and consumers are participating once again."

European markets traded higher after upbeat eurozone data and a Markit report showing a return to growth of the U.K. services sector in January.

Gold for April delivery fell $2.90 to settle at $1,673.50 an ounce at the Comex division of the New York Mercantile Exchange, while March crude oil futures added 57 cents to close at $96.74 a barrel.

The benchmark 10-year Treasury fell 13/32 to raise the yield to 2.005%. The dollar was off 0.03%, according to the U.S. dollar index.

In corporate news, Yum! Brands(YUM) said Monday that fourth-quarter profit fell 5% and warned that it expects earnings for the year to decline amid a controversy over its chicken suppliers in China. Shares dropped 2.9%.

BP(BP) , the energy giant, said fourth-quarter earnings fell 79%, largely because of payouts related to the Gulf of Mexico oil spill. ADRs rose 1.4%.