The S&P 500 climbed 1.66% to end the session at 7,437.63 points.
The Nasdaq gained 2.78% to 25,122.18 points, while the Dow Jones Industrial Average rose 1.19% to 52,208.06 points.
Seven of the 11 S&P 500 sector indexes rose, led by technology .SPLRCT, up 5.2%, followed by a 1.6% gain in consumer discretionary .SPLRCD.
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 US30YT=RR 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.O fell 2.6% after the chipmaker forecast fourth-quarter profit below estimates and said revenue from Apple products would decline faster than expected.
Fair Isaac FICO.N slumped 17%. Even though the credit-scoring giant lifted its annual profit and revenue forecasts, they remained below analysts' estimates.
Starbucks SBUX.O rose 1.6% after the world's largest coffee chain raised its annual sales and profit forecasts.
Analysts on average expect S&P 500 aggregate second-quarter earnings to jump 40% from a year ago, with AI-related stocks accounting for much of that growth, according to LSEG I/B/E/S.
Strong earnings forecasts and a recent decline in share prices have left the S&P 500 trading at about 20 times expected earnings, just above its 10-year average of 19, according to LSEG data.
Across the U.S. stock market .AD.US, advancing stocks outnumbered falling ones by a 2.2-to-one ratio.
Volume on U.S. exchanges was relatively heavy, with 18.0 billion shares traded, compared to an average of 17.2 billion shares over the previous 20 sessions.
Chip stocks and major megacaps move higher
The PHLX chip index .SOX surged 8.2%, with Micron Technology jumping 18%, Sandisk SNDK.O soaring 26% and Advanced Micro Devices AMD.O up 13%.
Amazon AMZN.O rose 3.9% and Apple AAPL.O dipped 1.4%, with both companies set to report their results after the market closes.
Amazon's stock has underperformed the broader market this year due to concerns about heavy spending on AI. Apple AAPL.O, which has not spent heavily on AI, recently overtook Nvidia NVDA.O to become the world's most valuable company, with a market value of about $4.9 trillion.
AI spending worries hit Meta and other tech names
This year, investors have been spooked by heavy spending on AI at big technology firms. Negative cash-flow reports from Alphabet GOOGL.O and Tesla TSLA.O 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.O tumbled 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 delivered yesterday, and maybe Microsoft is going to be able to move itself from the 'battleground' camp to be a 'trusted AI winner' stock," Ellerbroek said.
Wall Street closes sharply higher on Microsoft surge
Wall Street ended sharply higher on Thursday, with chip stocks jumping and Microsoft logging 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.O jumped over 15%, boosting its stock market value by $450 billion, the greatest-ever single-day increase for a company on Wall Street.
The tech heavyweight 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.
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