US stocks rallied on the trading day. The S&P 500 Index rose 0.86%, the Dow Jones Industrial Average gained 0.29%, and the Nasdaq 100 Index climbed 2.65%. September E-mini S&P futures were up 0.84%, and September E-mini Nasdaq futures rose 2.69%.

Microsoft's stock rose more than 13% after the company reported Q4 Azure and other cloud services revenue, excluding currency effects, up 43% year-over-year, beating the consensus estimate of 39.3%. This marked the fastest quarterly growth in four years for Azure revenue. The gains extended to chipmakers and AI-infrastructure stocks, following better-than-expected earnings from Lam Research. The Philadelphia Stock Exchange Semiconductor Index rose more than 7%.

Chip Stocks Surge, Software Tumbles

Chip stocks posted broad gains: Nebius Group surged more than 26%, leading the Nasdaq 100, while Sandisk rose more than 22%, leading the S&P 500. Lam Research climbed more than 21%, Western Digital advanced more than 15%, and Applied Materials and Micron Technology each gained more than 14%. Seagate Technology, Advanced Micro Devices, and Intel each rose more than 12%. Marvell Technology was up more than 10%, and KLA Corp gained more than 7%.

Conversely, software stocks tumbled after recent sharp gains, as investors rotated into chipmakers and exited the software sector. Meta Platforms fell more than 8% after a disappointing revenue forecast. Workday dropped more than 9%, while Adobe Systems, Atlassian Corp, and Intuit each fell more than 7%. ServiceNow and Thomson Reuters declined more than 6%, Salesforce fell more than 5%, and Autodesk was down more than 5%. Palantir Technologies slipped more than 2%.

Economic Data and Earnings Outlook

US economic news was mixed for stocks. Q2 GDP rose 1.5% (quarter-over-quarter annualized), below expectations of 2.0%, but personal consumption grew 3.2%, exceeding expectations of 2.3%. The core PCE price index eased to 3.4% from 4.4% in Q1, slower than expected. Weekly initial unemployment claims rose 9,000 to 197,000, lower than the 200,000 expected. June personal spending rose 0.3% month-over-month, weaker than expected, while May's figure was revised upward to 0.9%. Personal income rose 0.2% in June, also below expectations. The core PCE price index year-over-year eased to 3.3% from 3.4% in May, matching expectations.

In the earnings season, Bloomberg Intelligence forecasts Q2 earnings may increase by 23%, following Q1's 30% growth. AI infrastructure stocks are expected to contribute nearly 60% of the S&P 500's earnings-per-share growth in Q2. According to Bloomberg data, 86% of the 243 S&P 500 companies that have reported so far beat estimates.

In other corporate news, Corcept Therapeutics rose more than 29% after raising its full-year revenue forecast to $1.1 billion to $1.2 billion, up from a prior range of $950 million to $1.05 billion, and above the consensus of $999.6 million. Amazon.com and Apple are scheduled to report earnings after today's close.

Middle East Tensions and Global Markets

In the Middle East, Pakistan's Foreign Ministry said negotiations between the US and Iran are 'ongoing' to restore stability, particularly in the Strait of Hormuz. The US claimed its navy escorted some tankers through the strait. US Central Command said the US launched airstrikes against dozens of military targets in Iran aimed at degrading Iran's ability to threaten US troops. Iran retaliated by launching drones and missiles into Kuwait and Jordan. Iranian Deputy Foreign Minister Gharibabadi said Oman's proposal for a route through the strait, with 50% under Iran's control and 50% under Oman's, would not address Iran's concerns, and that the inbound passage and part of the outbound channel must be entirely under Iran's control. Shipping through the Strait of Hormuz has picked up in recent days, but the US maintains its blockade of Iranian oil shipments in the Persian Gulf. Diplomatic attempts to reopen the strait appear to be at an impasse. September WTI crude oil prices turned lower amid hopes for progress toward a diplomatic solution.

Globally, the Euro Stoxx 50 rose 1.59%, while China's Shanghai Composite fell 0.62% to a one-week low. Japan's Nikkei-225 closed up 0.71%. In Europe, the Eurozone Q2 GDP grew 0.4% quarter-over-quarter and 1.0% year-over-year, stronger than expected. The Eurozone July economic confidence indicator rose to a five-month high of 96.9, while the unemployment rate held at 6.3%. German July CPI (EU harmonized) rose to 2.8% year-over-year. The Bank of England kept its benchmark rate unchanged at 3.75% in a 6-3 vote, and said there were 'clear signs' that domestic inflationary pressures are easing and 'little evidence' that the energy shock has stoked wage demands. Markets are discounting an 84% chance of a 25 basis point ECB rate hike at their next meeting.

In rates, the 10-year T-note yield rose 2 basis points to 4.66% (later reported at 4.663% on a +2.3 bp move). T-notes slid on reduced safe-haven demand, but recovered from their worst level after US data showed weaker Q2 GDP and easing core PCE. The FOMC kept interest rates unchanged on Wednesday. The 10-year German bund yield rose 1 basis point to 3.170%, while the 10-year UK gilt yield fell 3.2 basis points to 5.004%. Markets are discounting a 62% chance of a 25 basis point rate hike at the next FOMC meeting on September 15-16.