Investors appeared to view the sell-off as an overreaction, writes Glenda Kwek.
The sharemarket reversed some of Thursday's substantial losses, the biggest one-day fall since May, closing above 5000 points to end the week on a positive note.
The S&P/ASX200 rose 0.8 per cent on Friday, up 38 points to 5018.1, while the broader All Ords rose by 38.1 points, or 0.8 per cent, to 5036.7 points.
On the ASX 24, the March share price index futures contract reached 4996, 29 points higher, with 39,902 contracts traded.
"Overall it [Thursday's loss] seemed to be a slight hiccup," Commonwealth Securities analyst Steven Daghlian said. "Both the ASX and the All Ords have crept back up above the 5000-point mark and that's a good sign."
The Deutsche Bank head of research sales, Glenn Morgan, said Thursday's heavy losses were an overreaction to what was said in the US Federal Reserve minutes about bond purchases.
"The outlook was probably more balanced than people thought on reflection," Mr Morgan said.
A fairly optimistic tone set by Reserve Bank governor Glenn Stevens in a statement to the House of Representatives standing committee on economics on Friday also lifted sentiment, with some economists speculating the interest rates easing cycle could be coming to an end.
Mr Stevens said the high Australian dollar had helped offset the surge in investment in the mining industry, which would otherwise have led to higher interest rates.
All the sectors ended higher on Friday. Gold rose 3.5 per cent, financials were up 0.8 per cent and materials lifted by 0.2 per cent.
The big four banks - ANZ, Commonwealth Bank, National Australia Bank and Westpac - all had gains, with both Westpac and NAB closing 1.3 per cent higher.
Resources groups BHP Billiton and Rio Tinto finished slightly lower, by 0.8 per cent and 0.9 per cent respectively. Newcrest Mining rose by 1.55 per cent.
Mr Morgan said the reporting season had turned the mood on the markets more positive, after initial fears at the start of the year the rally would not be backed up by companies' earnings.
"There have been a few disappointments but our analysts have been upgrading forecasts for the next two years during reporting season, which is something which we haven't seen for quite a while," he said.
"There's still a bit of [price-earnings] expansion, but I think we've found a floor in earnings. Companies have done a terrific job on costs and if we get a better macro-economic backdrop, the leverage to the upside could be quite large."
Telstra added 6¢ on Friday to $4.56 and Woolworths jumped 42¢, or 1.24 per cent, to $34.27.
Billabong shares fell 5¢, or 5.49 per cent, to 86¢ after the troubled surfwear retailer announced a first-half loss of $536.6 million and downgraded its underlying earnings.
Oil and gas producer Santos impressed investors enough with a positive outlook for cash flow from new liquefied natural gas projects to overshadow a fall in net profit, closing up 15¢ to $12.05.
Sims Metal Management was up 57¢ to $11.24 after narrowing its first-half loss and announcing the retirement of its chief executive.