S&P 500 jumps 1.7% as Microsoft earnings revive AI rally

The S&P 500 gained 1.7% and the Dow Jones Industrial Average climbed 645 points as Microsoft's earnings beat revived confidence in AI-driven technology stocks. The Nasdaq Composite surged about 3%, snapping a six-session losing streak as technology stocks led the advance.

The rally reversed a selloff that had raised questions about AI investment profitability. "The share prices of some of the global tech giants at the heart of the AI revolution have come under pressure amid a variety of concerns, raising the question of whether the wheels are falling off the AI stock market train," John Higgins, chief economic adviser at Capital Economics, said before the earnings release.

Microsoft shares jumped more than 16% after the software giant reported stronger Azure cloud growth, forecast quarterly sales above Wall Street estimates and projected capital expenditures below analyst expectations. The company also indicated it expects to continue generating cash throughout fiscal 2027. The upbeat results helped restore confidence in AI-related investments after recent concerns that heavy spending on data centers was weighing on profitability across the technology sector.

Semiconductor stocks rallied alongside Microsoft. The iShares Semiconductor ETF (SOXX) advanced more than 8%, while Micron Technology and Advanced Micro Devices each surged more than 13%. South Korean chipmaker SK Hynix gained more than 17%. The broader momentum trade also returned, with the iShares MSCI USA Momentum Factor ETF (MTUM) rising more than 5%.

The rebound came a day after the Dow suffered its biggest one-day decline since April 2025 as investors questioned the Federal Reserve's inflation strategy and pushed Treasury yields sharply higher. The 30-year Treasury yield remained near its highest level since 2007 after climbing above 5.2% during the previous session, while the rest of the yield curve was little changed. Traders reduced the probability of a September interest rate increase to about 59%, down from roughly 82% a week earlier, according to CME FedWatch data.

Not all technology companies shared in the gains. Meta Platforms fell about 9% after reporting a 91% decline in second-quarter free cash flow and issuing weaker-than-expected revenue guidance, reinforcing investor scrutiny of AI-related capital spending. Qualcomm declined after forecasting fourth-quarter profit below analyst expectations and warning that revenue from Apple-related products would fall faster than previously anticipated. Amazon traded higher ahead of its quarterly earnings release, while Apple edged lower before reporting results after the market close.

Economic data released Thursday showed the US economy expanded at an annualized rate of 1.5% in the second quarter, below expectations of 2.1%, as a wider trade deficit weighed on growth. Separate data indicated inflation moderated during June, offering some relief after recent inflation concerns.

Second-quarter earnings have remained strong, with analysts expecting aggregate S&P 500 earnings to increase about 40% from a year earlier, according to LSEG I/B/E/S data. AI-related companies continue to account for much of that growth, while the recent market pullback has left the S&P 500 trading at around 20 times expected earnings, slightly above its 10-year average. Starbucks gained after raising its full-year sales and profit forecasts, while Fair Isaac moved lower after lifting its annual profit and revenue forecasts.

Asian markets extended the rally on Friday, with South Korea's Kospi surging over 13% as chipmakers SK Hynix and Samsung rallied. Japan's Nikkei 225 gained 5.35%. Oil prices extended their decline after a Saudi Arabia-led proposal to strengthen defence co-operation in the Red Sea eased concerns over potential supply disruptions.

This article is for informational purposes only and does not constitute investment advice.