American stocks continued their recovery from a three-week rout after Cisco Systems Inc. raised its sales forecast and speculation increased that banks and homebuilders may have weathered the worst of the subprime mortgage shakeout.

Merrill Lynch & Co. and Morgan Stanley helped lead the Standard & Poor’s 500 Index higher for a third day after a Citi Investment Research analyst recommended buying the shares. Pulte Homes Inc. pushed a gauge of construction companies to its biggest advance in four years. Cisco, the world’s largest maker of computer-networking equipment, climbed to a six-year high after saying demand for Internet gear increased.

The S&P 500 rose 20.78, or 1.4%, to 1497.49. The Dow Jones Industrial Average gained 153.56, or 1.1%, to 13,657.86. The Nasdaq Composite Index added 51.38, or 2%, to 2612.98, its biggest advance since October.

Stocks have recouped almost half of the $1.6 trillion lost the previous three weeks on concern mortgage defaults would spread through credit markets. An S&P 500 index of financial shares has gained 7.9% since ending last week at a 13-month low, helped yesterday when the Federal Reserve said the housing slump won’t derail the economic expansion.

“You’ve got a pretty good opportunity in your money-center banks and brokers,” said David Katz, who helps oversee $1.6 billion as chief investment officer of New York-based Matrix Asset Advisors Inc. “The negative exposure they have is fairly minimal, and you’re getting them at a great price.”

Stocks also got a boost after a government report showed sales at American wholesalers climbed faster than inventories in June and the perceived risk of owning corporate bonds fell.

A Citi analyst, Prashant Bhatia, wrote that the drag on earnings at Wall Street’s five biggest investment banks from the declining value of leveraged-buyout loans is “very manageable.” He said the banks may be stuck with $75 billion of loans that could reduce annual earnings by 2% to 5%.

Investors have been cutting back on riskier assets such as the loans and bonds that fund leveraged buyouts after being burned by losses on subprime mortgages.

Merrill Lynch, the third-biggest American securities firm, climbed $2.98 to $78.17. Morgan Stanley, the second-largest securities firm, increased $1.06 to $65.39. Lehman Brothers Holdings Inc., the largest American underwriter of mortgage bonds, increased $4.07 to $64.78.

Bear Stearns Cos., the no. 2 underwriter, climbed $4.23 to $121.12. Chief Executive Officer James Cayne is planning to go to China to look for a joint-venture partner or a partnership that would lead to a strategic investment in the company, CNBC reported, without citing anyone.

Goldman Sachs Group Inc. rose $2.05 to $193.30. The stock fell in the last hour, dragging down the S&P 500, on speculation the investment bank would announce losses at a hedge fund. Shares erased the decline after Goldman said there would be no announcement.