(Updates with afternoon trading)

* Microsoft ( MSFT ) soars after forecasting upbeat sales, cloud

growth

* Meta drops after second-quarter free cash flow plunges 91%

* Traders trim Sept rate hike expectations

* S&P 500 +1.45%, Nasdaq +2.53%, Dow +1.02%

By Noel Randewich

July 30 (Reuters) - Wall Street rallied on Thursday, with

chip stocks soaring and Microsoft ( MSFT ) on track for its biggest daily

percentage gain in 18 years after the technology giant gave a

stellar forecast that eased fears about massive spending on AI

infrastructure.

Microsoft ( MSFT ) jumped 17%, boosting its stock market value

by almost $500 billion, after the technology company forecast

quarterly sales and cloud growth above expectations. It also

reported capital expenditures below estimates and said it

expects to keep generating cash through its fiscal 2027 that has

just begun.

This year, investors have been spooked by heavy spending on AI

at big technology firms. Negative cash-flow reports from

Alphabet and Tesla last week sparked a bout

of selling in AI-linked stocks, with chip stocks also under

pressure as investors questioned high valuations.

Meta Platforms ( META ) tumbled 9% after the social media

heavyweight reported a 91% drop in second-quarter free cash

flow, indicating the financial strain of its costly AI buildout.

"These are true battleground stocks. Investors can't make up

their minds whether the ROI on the massive capex spending is

going to be worthwhile or not," said Jed Ellerbroek, portfolio

manager at Argent Capital Management.

"Microsoft ( MSFT ) delivered yesterday, and maybe Microsoft ( MSFT ) is going to

be able to move itself from the 'battleground' camp to be a

'trusted AI winner' stock," Ellerbroek said.

The PHLX chip index surged almost 8%, with Micron

Technology jumping 18%, Sandisk ( SNDK ) soaring 24% and

Advanced Micro Devices ( AMD ) up 14%.

Amazon ( AMZN ) rose 4% and Apple ( AAPL ) dipped 2%, with both

companies set to report their results after the market closes.

Amazon's ( AMZN ) stock has underperformed the broader market this year

due to concerns about heavy spending on AI. Apple ( AAPL ),

which has not spent heavily on AI, recently overtook Nvidia ( NVDA )

to become the world's most valuable company, with a

market value of $4.9 trillion.

The S&P 500 jumped 1.45% at 7,421.97 points. The Nasdaq gained

2.53% to 25,060.99 points, while the Dow Jones Industrial

Average was up 1.02% at 52,122.78 points.

On Wednesday, U.S. stocks closed sharply lower after the

Federal Reserve left interest rates unchanged, with mixed

messages from new Fed Chair Kevin Warsh leaving traders confused

about the path of borrowing costs.

Bond markets remained on edge, with the yield on the 30-year

Treasury bond surging to its highest level in 19

years.

Traders are now only pricing in a 59% chance for a rate hike at

the Fed's September meeting, according to CME FedWatch, down

from 82% a week ago.

U.S. economic growth slowed in the second quarter as the trade

deficit widened. The economy grew at a 1.5% rate, slower than

estimates of 2.1% growth, data showed. A separate reading also

showed U.S. inflation slowed in June.

Qualcomm ( QCOM ) fell 2.3%, as the chipmaker forecast

fourth-quarter profit below estimates and said revenue from

Apple ( AAPL ) products would decline faster than expected.

Fair Isaac ( FICO ) slumped 16%. Even though the credit-scoring

giant lifted its annual profit and revenue forecasts, they

remained below analysts' estimates.

Starbucks ( SBUX ) rose 2.3% after the world's largest coffee

chain raised its annual sales and profit forecasts.

Even though Microsoft ( MSFT ) lifted the S&P 500, declining stocks

outnumbered rising ones in the benchmark index by a

2.0-to-one ratio.

The S&P 500 posted 4 new highs and 4 new lows; the Nasdaq

recorded 58 new highs and 126 new lows.