By Noel Randewich
July 30 (Reuters) - Wall Street rallied on Thursday, with chip stocks soaring and Microsoft on track for its biggest daily percentage gain in 18 years after the technology giant gave a stellar forecast that eased fears about massive spending on AI infrastructure.
Microsoft jumped 17%, boosting its stock market value by almost $500 billion, after the technology company forecast quarterly sales and cloud growth above expectations. It also reported capital expenditures below estimates
and said it expects to keep generating cash through its fiscal 2027 that has just begun.
This year, investors have been spooked by heavy spending on AI at big technology firms. Negative cash-flow reports from Alphabet and Tesla last week sparked a bout of selling in AI-linked stocks, with chip stocks also under pressure as investors questioned high valuations.
Meta Platforms tumbled 9% after the social media heavyweight reported a 91% drop in second-quarter free cash flow, indicating the financial strain of its costly AI buildout.
"These are true battleground stocks. Investors can't make up their minds whether the ROI on the massive capex spending is going to be worthwhile or not," said Jed Ellerbroek, portfolio manager at Argent Capital Management.
"Microsoft delivered yesterday, and maybe Microsoft is going to be able to move itself from the 'battleground' camp to be a 'trusted AI winner' stock," Ellerbroek said.
The PHLX chip index surged almost 8%, with Micron Technology jumping 18%, Sandisk soaring 24% and Advanced Micro Devices up 14%.
Amazon rose 4% and Apple dipped 2%, with both companies set to report their results after the market closes.
Amazon's stock has underperformed the broader market this year due to concerns about heavy spending on AI. Apple, which has not spent heavily on AI, recently overtook Nvidia to become the world's most valuable company, with a market value of $4.9 trillion.
The S&P 500 jumped 1.45% at 7,421.97 points. The Nasdaq gained 2.53% to 25,060.99 points, while the Dow Jones Industrial Average was up 1.02% at 52,122.78 points.
On Wednesday, U.S. stocks closed sharply lower after the Federal Reserve left interest rates unchanged, with mixed messages from new Fed Chair Kevin Warsh leaving traders confused about the path of borrowing costs.
Bond markets remained on edge, with the yield on the 30-year Treasury bond surging to its highest level in 19 years.
Traders are now only pricing in a 59% chance for a rate hike at the Fed's September meeting, according to CME FedWatch, down from 82% a week ago.
U.S. economic growth slowed in the second quarter as the trade deficit widened. The economy grew at a 1.5% rate, slower than estimates of 2.1% growth, data showed. A separate reading also showed U.S. inflation slowed in June.
Qualcomm fell 2.3%, as the chipmaker forecast fourth-quarter profit below estimates and said revenue from Apple products would decline faster than expected.
Fair Isaac slumped 16%. Even though the credit-scoring giant lifted its annual profit and revenue forecasts, they remained below analysts' estimates.
Starbucks rose 2.3% after the world's largest coffee chain raised its annual sales and profit forecasts.
Even though Microsoft lifted the S&P 500, declining stocks outnumbered rising ones in the benchmark index by a 2.0-to-one ratio.
The S&P 500 posted 4 new highs and 4 new lows; the Nasdaq recorded 58 new highs and 126 new lows.
(Reporting by Sruthi Shankar, Shashwat Chauhan and Ragini Mathur in Bengaluru, and by Noel Randewich in San Francisco; Editing by Devika Syamnath, Maju Samuel and David Gregorio)
