*

PCE inflation rises moderately in June

*

Russell 2000, S&P Small Cap 600 gain for fourth day in

five

*

Deckers, Baker Hughes ( BKR ), Norfolk Southern ( NSC ) climb after

results

*

Indexes up on Friday: Dow 1.64%, S&P 1.11%, Nasdaq 1.03%

*

Indexes this week: Dow up 0.8%, S&P down 0.8%, Nasdaq down

2.1%

(Updates with closing prices)

By David French

July 26 (Reuters) - Wall Street's major indexes ended

higher on Friday as investors flocked back to tech megacaps that

had triggered broad sell-offs earlier in the week, and inflation

data boosted optimism that the Federal Reserve will soon

commence cutting interest rates.

For the S&P 500 and Nasdaq Composite, the

advances could not completely recoup the ground lost in the two

previous sessions, with both indexes ending the week lower for

the second consecutive week.

The Dow Jones Industrial Average ended in positive

territory for the week. Its Friday gains were aided by

industrial conglomerate 3M ( MMM ), which jumped 23% to its

largest daily percentage gain in decades after it raised the

lower end of its annual adjusted profit forecast.

Five members of the so-called Magnificent Seven rose on

Friday, led by Meta Platforms ( META ) which climbed 2.7%. The

two exceptions were Tesla and Alphabet, whose

lackluster earnings had triggered Wednesday's big market

sell-off. They both fell 0.2%, with Alphabet dropping to its

lowest close since May 2.

With further Magnificent Seven earnings due next week,

the immediate outlook for markets may hinge on what type of

results these companies deliver.

"What we get next week from Apple ( AAPL ), Microsoft ( MSFT )

, Amazon.com ( AMZN ) and Meta is really going to set

the tone for whether that rotation continues and, directionally,

where the market goes," said Greg Boutle, head of US equity &

derivative strategy at BNP Paribas.

The rotation involves moving out of a set of

high-momentum stocks, whose valuations now appear inflated, to

underperforming sectors like mid- and small-cap stocks.

This shift seems to have gained momentum in recent weeks,

with the small-cap Russell 2000 and S&P Small Cap 600

both advancing to their fourth closing highs of the

week.

The Russell 2000 scored its third straight weekly

gain in two months and its best three-week run since August

2022.

These economically sensitive small-caps were supported

on Friday by the moderate rise in June U.S. prices, which

underlined cooling inflation and potentially positions the Fed

to start easing policy in September.

Bets on a 25-basis-point cut at the Fed's September

meeting held steady at about 88% after the PCE reading,

according to CME's FedWatch. Traders still largely expect two

rate cuts by December, LSEG data showed.

"We did see (the stable economic data) as beneficial for

that broadening trade," said Adam Hetts, global head of

multi-asset at Janus Henderson ( JHG ), noting small-caps had

outperformed the S&P 500 by more than 10% over the last month.

The broadening trade has also benefited cyclical sectors of

the economy. On Friday, all 11 of the S&P sectors were higher,

with Industrials and Materials the leading

gainers.

On Friday, the S&P 500 gained 59.88 points, or 1.11%,

at 5,459.10 points, while the Nasdaq Composite climbed

176.16 points, or 1.03%, to 17,357.88. The Dow Jones Industrial

Average rose 654.27 points, or 1.64%, to 40,589.34.

For the week, the Dow gained 0.75%, while the S&P 500

declined 0.82% and the Nasdaq dropped 2.08%.

Among stocks boosted by earnings, Deckers Outdoor ( DECK )

jumped 6.3% after it raised its annual profit forecast, while

oilfield services firm Baker Hughes ( BKR ) climbed 5.8% after

beating estimates for second-quarter profit.

Norfolk Southern ( NSC ) soared 10.9%, its largest one-day

percentage gain since March 2020, after the rail operator

reported second-quarter profit above Wall Street estimates

thanks to robust pricing.

Medical device maker Dexcom ( DXCM ) slumped 40.6% after

cutting its annual revenue forecast.

Volume on U.S. exchanges was 10.92 billion shares, compared

with the 11.61 billion average for the full session over the

last 20 trading days.