(Updates to afternoon trading, adds comment by fund manager)

* Indexes: Dow flat, S&P 500 up 0.61%, Nasdaq up 0.94%

* Eli Lilly ( LLY ) advances after CVS brings back Zepbound

coverage

* Microsoft ( MSFT ) up on report company will release new coding

model next week

* U.S. inflation rises at its fastest pace in three years

By Saeed Azhar, Twesha Dikshit and Utkarsh Hathi

May 28 (Reuters) - The S&P 500 and the Nasdaq extended

gains on Thursday, briefly hitting intraday record highs, after

news reports said the U.S. and Iran had reached a deal, while

investors also digested key inflation data.

The news was first reported by Axios, which said that

negotiations on Iran's nuclear program would be held during the

60-day truce period, but that the plan still needed the approval

of President Donald Trump.

"Traders are on a hair trigger with the back-and-forth on

deal news, and have been leaning long to avoid getting trampled

by a better-than-expected outcome. The harder part is that the

inflationary forces may not abate as fast as markets want," said

Jamie Cox, managing partner at Harris Financial Group.

Economic data showed U.S. inflation increased at its fastest

pace in three years in April, driven by higher energy prices

amid the Iran war.

Meanwhile, U.S. GDP for the first quarter was revised lower to a

1.6% annualized increase, with momentum expected to slow this

quarter.

At 2:04 p.m. EDT, the Dow Jones Industrial Average

fell 19.74 points, or 0.04%, to 50,625.05, the S&P 500

gained 45.63 points, or 0.61%, to 7,565.99 and the Nasdaq

Composite gained 250.65 points, or 0.94%, to 26,925.38.

The S&P 500 healthcare index gained 1.3%. Eli Lilly ( LLY )

advanced 3.9% after CVS Health ( CVS ) said it would

restore the drugmaker's weight-loss injection, Zepbound, to its

coverage and add its newly approved obesity pill Foundayo.

Tech shares also moved almost 1.6% higher.

Microsoft ( MSFT ) gained 3.8% after news website the

Information reported the company would release a new coding

model next week.

Marvell Technology ( MRVL ) rose 3.6% after UBS raised its

target price to $230 from $195.

The company's shares have more than doubled so far this

year.

Snowflake soared 38% after the data analytics firm

lifted its annual product revenue forecast and announced a

five-year AI infrastructure deal worth $6 billion with Amazon

Web Services.

Peers Datadog ( DDOG ) and MongoDB ( MDB ) rose 3.5% and

11.7%, respectively.

Five of the 11 main S&P 500 sectors were in the green.

Renewed confidence in AI and earnings growth momentum have

underscored the recent rally despite the Middle East tensions,

which have increased inflationary expectations.

"Markets continue to look through these risks because the

global economy and corporate earnings remain relatively

resilient," said Jitania Kandhari, deputy CIO, solutions and

multi-assets, at Morgan Stanley Investment Management.

"Geopolitical instability could ultimately accelerate

spending in areas tied to AI, including cybersecurity, defense

technology, energy infrastructure and supply-chain resiliency,

reinforcing the long-term investment case."

While the S&P 500 is trading at roughly 21 to 22 times

forward earnings versus a trailing 10-year average of 19.7

times, investors are less concerned because earnings

expectations are rising faster than stock prices, Kandhari said.

Among other movers, Dollar Tree ( DLTR ) climbed 18% after the

discount retailer lifted its full-year profit forecast, while

Best Buy ( BBY ) also added 18% after the electronics vendor

forecast second-quarter sales above estimates.

Drone companies rose after the Wall Street Journal reported

that the Trump administration was in talks to fund drone firms.

Unusual Machines ( UMAC ) jumped 67%.

Advancing issues outnumbered decliners by a 1.63-to-1 ratio

on the New York Stock Exchange. There were 402 new highs and 87

new lows on the NYSE.

On the Nasdaq, 3,030 stocks rose and 1,757 fell as advancing

issues outnumbered decliners by a 1.72-to-1 ratio.

The S&P 500 posted 15 new 52-week highs and 10 new lows

while the Nasdaq Composite recorded 112 new highs and 63 new

lows.