Wall Street surges over 1 percent, banks and tech rally

By Noel Randewich

(Reuters) - Wall Street surged over 1 percent on Tuesday, with solid gains in technology and bank shares as investors grew more comfortable with the possibility that the U.S. Federal Reserve might soon raise interest rates.

Comments from several policymakers in recent days have investors expecting a rate hike potentially in June, much sooner than previously thought given sluggish economic growth.

Wall Street has benefited from historically low borrowing costs since the 2008 financial crisis and higher rates could choke further gain. But strategists on Tuesday said they were reassured by expectations the Fed would tighten borrowing costs only gradually.

"The market is starting to contemplate the idea that Fed rate hikes this year are A: more likely, and B: not inherently bad in and of themselves," said Bill Merz, an investment strategist with U.S. Bank Wealth Management.

Shares gained in the banking sector <.SPSY>, which stands to gain from higher interest rates. Bank of America , Citigroup and JPMorgan rose about 1.5 percent.

Microsoft rose 2.9 percent and provided the biggest boost to the Nasdaq and S&P 500, while UnitedHealth Group's 1.66 percent rise lifted the Dow.

Data on Tuesday showed new U.S. single-family home sales surged to a more than eight-year high in April and prices hit a record high, offering further evidence of a pick-up in economic growth.

At 2:36 pm, the Dow Jones industrial average was up 1.18 percent, to 17,698.79 and the S&P 500 had gained 1.28 percent to 2,074.21.

The Nasdaq Composite added 1.89 percent to 4,855.70.

Gains were broad-based, with all 10 S&P sectors rising and the tech sector <.SPLRCT> up 2.03 percent.

Oil reversed early losses to turn positive, as investors awaited crude oil inventory data from the United States that was expected to show a shrinking supply overhang.

Toll Brothers shares were up 8 percent after quarterly revenue beat expectations.

Twitter fell 2.35 percent after brokerage MoffetNathanson downgraded the company's stock to "sell" from "neutral".

Advancing issues outnumbered decliners on the NYSE by 2,231 to 740. On the Nasdaq, 2,165 issues rose and 617 fell.

The S&P 500 index showed 25 new 52-week highs and one new low, while the Nasdaq recorded 80 new highs and 25 new lows.

(Additional reporting by Tanya Agrawal; Editing by Nick Zieminski)