U.S. stocks gained on Thursday as Microsoft's stellar forecasts soothed concerns about massive AI spending by companies, while investors also parsed fresh GDP and inflation data a day after the Federal Reserve's rate decision.
Microsoft jumped around 15% after the company forecast current-quarter sales and cloud growth above expectations, capital expenditure below estimates and said it expects to keep generating cash through its fiscal 2027 that just began. Investors have been spooked by rising AI costs at big technology firms even as they report strong earnings.
Negative cash-flow reports from Alphabet and Tesla last week sparked a bout of selling in AI-linked stocks, with chip stocks also coming under pressure as investors questioned high valuations. The tech-heavy Nasdaq-100 dropped 10% from its early June peak on Wednesday. In a sign that AI concerns were far from over, Meta Platforms shed nearly 9% after the social media giant reported a 91% drop in second-quarter free cash flow, underscoring the financial strain of its costly AI buildout.
"The concern is no longer just how much these companies are spending - it's that higher rates may not deter them from spending more, because they see the AI buildout as a competitive necessity," said Anna Rathbun, CEO and founder of Grenadilla Advisory. Apple and Amazon are scheduled to report earnings after the bell. Amazon was up about 3%, while Apple was down 1.6% in early trading.
On the data front, U.S. economic growth slowed in the second quarter amid a widening in the trade deficit, increasing at a 1.5% rate versus estimates of 2.1% growth.
A separate reading also showed U.S. inflation slowed in June. At 09:50 a.m. ET, the Dow Jones Industrial Average rose 290.48 points, or 0.56%, to 51,884.62, the S&P 500 gained 81.98 points, or 1.12%, to 7,398.13 and the Nasdaq Composite gained 542.32 points, or 2.22%, to 24,985.26.
Technology stocks led gains among the major S&P sectors, rising 4.2% Chips also climbed early on, with the Philadelphia chips index up 6.7%, set to snap a five-day losing streak.
Markets closed sharply lower on Wednesday after the Fed left interest rates unchanged in the 3.50% to 3.75% range, but mixed messages from new Fed Chair Kevin Warsh left traders confused about the path of borrowing costs. "The hold on rates is justified when you're looking at the downward movement of the PCE numbers," Rathbun said.
Bond markets were on edge, with the yield on the 30-year Treasury bond surging to its highest level in 19 years, as investors grew increasingly concerned about the central bank's monetary-policy outlook and sought greater protection against future inflation. Traders currently see a 57% chance that the U.S. central bank will raise interest rates by 25 basis points at its September meeting, according to LSEG-compiled data.
Qualcomm fell 3.2%, as the chipmaker forecast fourth-quarter profit below estimates and said revenue from Apple products would decline faster than expected.
Carvana tumbled 9.9% after forecasting full-year adjusted core profit below Wall Street expectations. Starbucks was up 3.5% after the world's largest coffee chain raised its annual sales and profit forecasts. Advancing issues outnumbered decliners by a 1.21-to-1 ratio on the NYSE and by a 1.68-to-1 ratio on the Nasdaq. The S&P 500 posted two new 52-week highs and 2 new lows while the Nasdaq Composite recorded 30 new highs and 72 new lows.
