Microsoft surges 15.5% on AI profit gains; chip stocks recover

Microsoft led a powerful rebound on Wall Street Thursday after reporting profit stronger than analysts expected. The company's Azure cloud business showed strong growth, and CEO Satya Nadella attributed the strength to customers adopting Microsoft's AI capabilities. Microsoft's stock leaped 15.5% for its best day in nearly 18 years. The broader market responded enthusiastically: the S&P 500 rallied 1.7% and more than recovered its drop from the day before, which had been its worst in seven weeks. The Nasdaq composite, which is full of AI stocks, rallied 2.8% after falling 9.8% below its record set last month. The Dow Jones Industrial Average jumped 613 points, or 1.2%.

A key factor in the market's enthusiasm was what Microsoft did not do. The company did not announce a big increase in how much it plans to spend on AI investments—something several other Big Tech rivals have done. This restraint proved decisive, as Wall Street has grown increasingly concerned that aggressive AI spending is eating into companies' cash flows and may not ultimately be worth it if AI does not produce as much productivity and profits as promised. Meta Platforms provided a cautionary contrast: the parent company of Facebook and Instagram fell 8% after reporting weaker profit than expected for the latest quarter, even though it made slightly more in revenue than expected. Meta also raised the lower end of its forecasted range for spending on investments for the year, a move that traders interpreted as a warning sign about capital intensity.

Computer chip and memory makers recovered sharply Thursday, rebounding from recent sharp losses. Micron Technology jumped 18.4%, trimming its loss for the week to 5% and becoming the strongest force lifting the S&P 500 after Microsoft. Lam Research, a supplier to the semiconductor industry, soared 18% after reporting stronger profit and revenue than expected. Advanced Micro Devices rallied 13%. These companies supply the processors and memory that hyperscalers are buying to power AI efforts. The broader market climbed to 7,437.63 on the S&P 500, with the Dow reaching 52,208.06 and the Nasdaq composite reaching 25,122.18.

In the bond market, longer-term Treasury yields held steady but anxiety persisted about inflation. The yield on the 10-year Treasury remained at 4.67%, unchanged from late Wednesday. The 30-year Treasury yield ticked up to 5.22% from 5.20%, a day after jumping from 5.09%. These yields move with investors' expectations for inflation and economic growth in upcoming years. Federal Reserve chairman Kevin Warsh had reaffirmed Wednesday that the Fed wants to get inflation back to 2%, even though the central bank decided not to raise interest rates despite inflation remaining higher than that target. Warsh implied the bond market may already be doing some of the Fed's work to restrain inflation, pointing to how yields have climbed since the central bank's last meeting six weeks earlier. Investors questioned whether the Fed is prepared to act if inflation worsens, or whether it is relying on financial markets to achieve the same outcome. Seema Shah, chief global strategist at Principal Asset Management, noted that if investors conclude the latter is true, the credibility of the Fed's inflation-fighting commitment could come under increasing scrutiny.