US stocks closed sharply higher on Tuesday as soft economic data hinted that the Fed's aggressive policy is taking effect, while falling benchmark Treasury yields boosted the rally's momentum.

All three major US stock indexes advanced for the third straight session, with market-leading megacaps providing the most upside muscle. The S&P 500 has reclaimed about 8 percent from the trough of its October 12 close.

The Dow Jones finished up 1.1 percent at 31,836, the S&P 500 gained 1.6 percent to 3,859, and the Nasdaq jumped 2.3 percent to 11,199.

"There’s increasing discussion about a light at the end of the tunnel for Fed rate hikes," said Bill Merz, head of capital market research at US Bank Wealth Management in Minneapolis. Merz also cautioned that it wouldn't be known for some time whether decades-high inflation was "decisively headed toward the Fed’s target."

"We’re seeing a bit of a reprieve in the dollar and long-term bond yields have come down a little bit," Merz added. "Those factors are combining to provide room for a bit of a rally."

Yields of 10-year Treasuries pulled pack on hopes that the Federal Reserve could begin easing its battle against inflation.

A mixed brew of earnings and downbeat forecasts, usually a negative for markets, suggested the barrage of interest rate hikes from the Fed is beginning to be felt, raising hopes that the central bank could pull back on the size of rate hikes after its November 1-2 policy meeting.

Data on Tuesday showed slowing home price growth and souring consumer confidence. Such signs of economic softness, ordinarily unsupportive of risk appetite, are evidence of abating Fed hawkishness.

Coca-Cola rose 2.4 percent after the company upped its revenue and profit forecasts, banking on steady demand amid price increases.

General Motors reaffirmed its outlook after posting solid earnings, sending its shares jumping 3.6 percent.

On the downside, aerospace company Raytheon posted a near 5 percent annual revenue increase, but its shares slid 1.5 percent on the company's trimmed sales outlook.

Shares of Google parent Alphabet dropped as much as 6 percent in after hours trading after the company missed quarterly revenue estimates. (Reuters)