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(Reuters) – Stocks rallied on Tuesday on hopes that the Federal Reserve’s policymakers will agree on extending stimulus measures as the economy struggles to recover.

A sharp decline in German business sentiment, alongside stubbornly high Spanish bond yields, raised expectations for market-friendly stimulus from European policymakers as well.

The S&P 500 has gained more than 7 percent from a five -month low hit earlier in June, and is on track to close above its 50-day moving average for the first time in seven weeks. But the sharp gains also leave the market vulnerable if the outcome of Wednesday’s Fed meeting doesn’t meet market expectations.

Growth-related stocks led the rally, with the S&P materials sector index up 2 percent and the financial sector index up 1.9 percent. U.S. Steel Corp jumped 6.1 percent to $19.54 and Bank of America added 4.9 percent to $8.14.

The Federal Open Market Committee began on Tuesday the first day of a two-day meeting on interest-rate policy, with expectations increasing that the U.S. central bank may extend its “Operation Twist” program, its effort to drive down long-term borrowing costs.

“People are anticipating some type of response from the Fed tomorrow and are buying or covering shorts in anticipation of that,” said Paul Zemsky, head of asset allocation at ING Investment Management in New York. “There’s a risk the market gets disappointed.”

The Dow Jones industrial average rose 127.49 points, or 1.00 percent, to 12,869.31. The S&P 500 Index gained 15.89 points, or 1.12 percent, to 1,359.87. The Nasdaq Composite added 36.11 points, or 1.25 percent, to 2,931.44.

Spain’s government bond yields eased slightly after it raised 3 billion euros at a short-term debt sale, with the higher yields enticing investors. However, with its 10-year bond yield above 7 percent, investors worried over how long the euro zone’s fourth-largest economy can survive without foreign help.

In Greece, parties promised to form a coalition government soon and seek concessions from the country’s EU and IMF lenders on an austerity program that is both keeping the country away from bankruptcy and mired in a very long recession.

Oracle Corp rose 3 percent to $27.94 a day after it reported stronger-than-expected quarterly profit, releasing the results three days ahead of schedule after news of the pending departure of a senior sales executive fueled concerns that business was stagnating.

Walgreen Co tumbled 6.2 percent to $29.99 after the pharmacy chain reported quarterly earnings and said it would buy a 45 percent stake in Alliance Boots for $6.7 billion in a cash-and-stock deal.

FedEx Corp rose 3.9 percent to $91.89 after the package delivery company reported fourth-quarter earnings and provided an outlook for the first quarter and 2013.

Shares of J.C. Penney dropped 10.1 percent to $21.87 a day after its president abruptly left the department store operator following a botched advertising campaign.

Economic data showed U.S. housing starts fell in May from a 3-1/2 year high, but permits to build new homes rose sharply, suggesting the housing recovery remains on track.

(Reporting by Rodrigo Campos, additional reporting by Chuck Mikolajczak; Editing by Dave Zimmerman and Jan Paschal)