U.S. stock indexes surged Tuesday, led by a sharp rally in technology and chip-related shares after Microsoft delivered a strong update on its cloud business tied to artificial intelligence spending. The S&P 500 gained while the Nasdaq 100 jumped more than 2%, as investors increased expectations for near-term earnings momentum across the megacap and AI infrastructure complex.
At the same time, markets balanced the optimism from earnings with a mixed macro backdrop. Bond yields rose on concerns that progress on inflation may be slower than hoped, while oil prices slid as diplomacy around the Middle East offered some near-term relief, even as military tensions continued.
Key takeaways
- Price move: The Nasdaq 100 rose more than 2%, outpacing the S&P 500 and the Dow.
- Catalyst: Microsoft’s results showed faster growth in Azure and other cloud services, reinforcing confidence in AI-related spending.
- Cross-market impact: Chipmakers and AI infrastructure shares rallied, while some software names fell as investors rotated toward semiconductors.
- Rates and macro: The 10-year Treasury yield increased, even as core inflation (core PCE) came in line with expectations and jobless claims remained relatively contained.
- Next watch: Investors are set to digest additional megacap earnings later in the week, including Amazon and Apple, alongside upcoming Fed and economic data considerations.
What drove the rally
Stocks strengthened primarily after Microsoft shares jumped following its late Wednesday update. Microsoft reported Q4 Azure and other cloud services revenue ex-forex rising 43%, ahead of the 39.3% consensus estimate and the fastest quarterly growth in four years. Investors interpreted the result as evidence that large-scale spending on artificial intelligence is translating into measurable cloud demand and revenue growth.
The market’s enthusiasm quickly extended beyond software into the broader AI supply chain. Chipmakers and AI infrastructure stocks rallied as investors repositioned around the likelihood of continued earnings upgrades from AI-linked spending. A separate driver was the coming stream of megacap reports: attention is scheduled to shift to Amazon.com and Apple after the close.
Market reaction: tech leadership and sector rotation
Semiconductor-linked stocks moved higher sharply. The Philadelphia Stock Exchange Semiconductor Index rose more than 7%, and individual AI-adjacent names including Lam Research and Western Digital gained strongly. Several other chip-related companies also posted sizable advances, reinforcing the idea that earnings revisions are being concentrated in the infrastructure layer supporting AI workloads.
In contrast, software stocks fell as the rotation intensified. Shares of Workday declined after a large move earlier, alongside declines across other enterprise software names such as Adobe, Atlassian, Intuit, and ServiceNow, as well as Salesforce among Dow components. Investors appear to have reduced exposure to software at the margin in favor of companies perceived to benefit more directly from AI-related capex cycles.
Not all megacap developments were supportive. Meta Platforms shares fell more than 8% after a revenue forecast that disappointed expectations, providing a counterweight to the broader tech rally.
Macro signals and interest-rate pressure
Economic data were mixed for equities. Data showed Q2 GDP grew 1.5% (quarter-over-quarter annualized), below the 2.0% expectation, though consumer spending was stronger than anticipated. Weekly jobless claims increased by 9,000 to 197,000, which was less than the market’s 200,000 expectation, suggesting the labor market remained resilient.
On inflation, the core PCE price index—used by the Federal Reserve as a key gauge—eased to 3.3% year over year from 3.4% in May, aligning with expectations. Even so, bond yields rose, reflecting investor concern that the Fed may have limited room to accelerate inflation-fighting progress. The 10-year Treasury yield was up about 2 basis points to 4.66%.
Separately, European rates were mixed. The 10-year German bund yield rose slightly, while the UK gilt yield declined. Eurozone data included Q2 GDP growth that beat expectations and an uptick in the economic confidence indicator.
Oil and Middle East risk factors
Oil prices weakened as hopes for progress toward diplomacy around the Middle East tempered supply concerns. September WTI futures gave up an overnight advance and moved lower after reporting that negotiations between the U.S. and Iran were described as ongoing to restore stability, particularly around the Strait of Hormuz. Claims that shipping activity through the strait has increased added to the more constructive tone.
However, the geopolitical backdrop remained tense. The U.S. said it conducted airstrikes against dozens of military targets in Iran intended to reduce Iran’s ability to threaten U.S. troops. Iran responded with drone and missile launches into Kuwait and Jordan, while diplomatic discussions over a potential Strait of Hormuz route were described as at an impasse.
Earnings outlook: why investors are positioning now
Investors are focusing on the strength of recent earnings reports as the next wave of megacap results approaches. The article cited Bloomberg Intelligence forecasts suggesting Q2 earnings may rise 23%, nearing the 30% gain logged in Q1 and far above the 12% that analysts had expected earlier. AI spending was described as a primary driver, with AI infrastructure stocks potentially accounting for nearly 60% of S&P 500 earnings-per-share growth in Q2. According to Bloomberg data referenced in the report, 86% of 243 S&P 500 companies that had reported Q2 results through that point beat estimates.
In the background, the market also continued to weigh the path of interest rates. The article said markets were pricing a 62% chance of a 25 basis point hike at the next FOMC meeting on September 15–16.
What to watch next
As trading continues, investors will look for follow-through from Microsoft-led sentiment into other AI beneficiaries, while monitoring how Meta’s weaker forecast affects broader expectations for megacap earnings. The next catalysts include results from Amazon and Apple after the close, plus continued scrutiny of inflation and growth indicators that could influence Treasury yields and the rate path into the September FOMC meeting.
