Wall Street rises as small caps advance, megacaps recover ground

By Lisa Pauline Mattackal and David French

(Reuters) -Wall Street's main indexes climbed on Thursday, a day after a tech-triggered sell-off, with small-cap stocks and stronger-than-expected GDP data providing support.

The small-cap Russell 2000 jumped 2.3%, on track to fully recoup Wednesday's broad losses. The Dow led the three main benchmarks in percentage gains as investors reassessed their recent flight to underperforming sectors.

Most megacap stocks recovered from a shaky start and were in positive territory at mid-afternoon. Amazon.com <AMZN.O>, Apple and Nvidia all climbed between 0.8% and 1.2%.

While Alphabet's shares fell 0.8%, Tesla rose 4.5%. Lackluster earnings from the Google parent and the electric vehicle maker had pummeled the so-called Magnificent Seven group of tech stocks on Wednesday, prompting the Nasdaq and S&P 500 to log their worst day since 2022.

Gross domestic product data provided support, showing the U.S. economy expanded 2.8% in the second quarter versus an estimate of 2%. Inflation subsided, leaving expectations of a September Federal Reserve interest rate cut intact.

"We've been calling for a Goldilocks recovery, expecting the economy to hold up, and this report shows that the economy is actually quite strong," said Brian Klimke, chief market strategist at Cetera Investment Management. "The Fed doesn't necessarily need to kill growth; they're really looking to just kill inflation."

Bets on a 25-basis-point cut by September stood at 85.8%, from around 78% prior to Thursday's data, CME's FedWatch Tool showed.

Market participants are also pricing in at least two rate cuts by December, according to LSEG data.

Investors now await personal consumption expenditures price data on Friday to confirm bets of an early start to Fed rate cuts, after the recent trend of easing inflation and some labor market weakness.

While heavyweight stocks have powered the market to all-time highs this year, Wednesday's sell-off reinforced fears that these stocks might be over-stretched and are in for more turbulence.

This concern has driven value investors, speeding up their rotation into smaller-cap stocks and other sectors outside megacap technology.

The S&P Small Cap 600 rose 2.2% on Thursday.

As of 2:02 p.m. ET, the S&P 500 gained 31.81 points, or 0.59%, at 5,458.94 points, while the Nasdaq Composite rose 103.14 points, or 0.57%, to 17,445.55. The Dow Jones Industrial Average advanced 357.37 points, or 0.90%, to 40,211.24.

Among earnings-driven moves, IBM shares jumped 5.8%, also boosting the blue-chip Dow, after the tech company beat estimates for second-quarter revenue and raised the annual growth forecast for its software business.

American Airlines rose 4.1%, reversing premarket losses after cutting its annual profit forecast. Southwest Airlines climbed 6.8% after saying it would implement changes including ending open seating and offering seats with extra legroom.

Advances by airlines and logistics firms, of 6% for Old Dominion <ODFL.O> and 6.4% for J B Hunt , helped the Dow Jones Transportation Average gain 2.5%.

Ford slumped 17.3% after the automaker's second-quarter adjusted profit missed estimates by a wide margin. Edwards Lifesciences tumbled 29.6% after it missed second-quarter revenue estimates.

(Reporting by Ankika Biswas, Lisa Pauline Mattackal and Medha Singh in Bengaluru and David French in New York; Editing by Savio D'Souza, Saumyadeb Chakrabarty, Pooja Desai and Richard Chang)