The Dow Jones Industrial Average popped 1,201.43 points, or 3.70 percent, to 33,715.37. The S&P 500 increased 207.80 points, or 5.54 percent, to 3,956.37. The Nasdaq Composite Index spiked 760.98 points, or 7.35 percent, to 11,114.15. All the three major indexes notched their largest single-day rally since 2020.
All the 11 primary S&P 500 sectors ended in green, with technology and real estate up 8.33 percent and 7.75 percent, respectively, leading the advance.
The Cboe Volatility Index, widely considered as the best fear gauge in the stock market, dipped 9.81 percent to 23.53.
U.S. Treasury yields tumbled across the board on Thursday, also boosting equities, as lower bond yields would make equity investments more attractive.
The U.S. dollar plunged amid greater investor appetite for risk assets, with the dollar index, which measures the greenback against six major peers, falling 2.12 percent to 108.2040 in late trading on Thursday.
The above market reactions came after data showing signs of improvement in U.S. inflation.
The U.S. Labor Department reported Thursday that the country's CPI rose 0.4 percent in October, below the 0.6 percent consensus, for a 7.7 percent year-on-year increase. The core CPI, which excludes food and energy, rose 0.3 percent, also below the consensus estimate, for a 6.3 percent year-on-year increase.
The encouraging moves in consumer prices fueled expectations that the Fed might opt for a smaller interest-rate hike in December.
"The October CPI surprised to the downside, pushing market expectations solidly toward a 50bp (basis point) hike at the December meeting, for now," Will Compernolle, senior economist at FHN Financial, said Thursday in a note.
While the report showed some signs of progress, experts warned against premature optimism.
"There will need to be persistent improvements for the Fed to feel interest rates are sufficiently restrictive," said Compernolle, adding "the Fed still has a long way to go before it can be confident it has restored price stability."
Analysts at UBS said Thursday in an analysis that conditions for a sustained equity market rally are not yet in place, especially given the context that "the Fed, along with other major central banks, looks likely to keep tightening rates until the first quarter of 2023."
"We believe such headwinds have yet to be fully reflected in earnings estimates or equity valuations," they said, noting "the risk-reward for markets over the next three to six months looks unfavorable."
Last week, the Fed raised its benchmark rates by 75 basis points for the fourth consecutive meeting. Fed Chair Jerome Powell warned that it was "very premature" to think about pausing rate hikes, adding the central bank still had "some ways to go" in its efforts to tame inflation.
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