U.S. stocks rebounded Tuesday as largely on-target inflation data and easing jitters over contagion in the banking sector cooled expectations regarding the size of the rate hike at the Federal Reserve's policy meeting next week.

All three major U.S. stock indexes closed in positive territory, after several sessions of risk-off turmoil driven by the implosion of Silicon Valley Bank and Signature bank, and worries over contagion.

Financial stocks clawed back some losses, with the S&P 500 Banks index coming back from its steepest one-day sell-off since June 2020.

Bank contagion fears were allayed on Tuesday as reassurances by U.S. President Joe Biden and other global policymakers vowed the crisis would be contained.

"The market is having an opportunity to digest some of the news over the last couple of days," said Matthew Keator, managing partner in the Keator Group, a wealth management firm in Lenox, Massachusetts. "(Investors) are seeing a coordinated effort with various government agencies, and with hindsight, they’re feeling as if things have contained themselves a bit."

The Labor Department's CPI report showed consumer prices cooled in February, largely in line with market expectations, with headline and core measures notching welcome annual declines.

Even so, inflation has a considerable way to go before approaching the central bank's average annual 2% target.

But signs of economic softness, combined with the regional banking scare, have increased the odds that the Federal Reserve will implement a modest, 25 basis-point hike to its key interest rate at the conclusion of its two-day policy meeting on March 22.

"Part of the stabilization today is folks feeling as if the Fed might back off from some of the hawkish expectations that followed Chairman Powell's comments last week," Keator added.

"If the Fed isn't careful, they could create some unintended shocks to the system," he said.

Shock waves following the closure of Silicon Valley Bank and Signature bank, which prompted Biden to vow he would contain the crisis and ensure the safety of the U.S. banking system, continued to reverberate throughout the sector.

The S&P 500 banking index reclaimed territory lost to Monday's plunge, its biggest one-day drop since June 2020.

According to preliminary data, the S&P 500 gained 64.26 points, or 1.67%, to end at 3,920.02 points, while the Nasdaq Composite gained 239.71 points, or 2.14%, to 11,428.55. The Dow Jones Industrial Average rose 326.66 points, or 1.03%, to 32,145.80.

Shares of First Republic Bank surged.

Meta Platforms Inc. announced 10,000 job cuts in its second round of layoffs, sending its stock higher.

Ride-hailing app rivals Uber Technologies Inc and Lyft Inc jumped following a California state court decision that revived a ballot measure allowing the companies to treat drivers as independent contractors rather than employees.

United Airlines Holdings Inc fell after the commercial carrier unexpectedly forecast a current quarter loss.

AMC Entertainment Holdings plummeted between multiple trading halts in the wake of its shareholders voting in favor of converting preferred stock into common shares.