July 26 (Reuters) - Wall Street's major indexes closed higher on Friday, recouping some ground lost earlier this week, as investors flocked back to tech megacaps that had triggered broad sell-offs and inflation data boosted optimism that interest rate cuts will soon begin.
The Dow Jones Industrial Average (.DJI), led the way, aided by industrial conglomerate 3M (MMM.N), which jumped to its largest daily percentage gain in decades after it raised the lower end of its annual adjusted profit forecast.
The S&P 500 (.SPX), and Nasdaq Composite (.IXIC), also finished the week stronger, aided by rebounds in megacap stocks that led the indexes' declines in the two prior sessions.
Members of the so-called Magnificent Seven mostly rose, led by Meta Platforms (.META.O), opens new tab.
Chip stocks also rose, helping the Philadelphia SE Semiconductor index (.SOX), snap a three-day losing streak. Constituents Marvell Technology (MRVL.O), Broadcom (AVGO.O), Texas Instruments (TXN.O), and Qualcomm (QCOM.O), each advanced.
The 10-year Treasury yield turned lower following the inflation data.
Economically sensitive small-cap stocks rose, with the Russell 2000 (.RUT), and S&P Small Cap 600 (.SPCY), both advancing to their fourth closing highs of the week.
The moderate rise in U.S. prices underlined an improving inflation environment, potentially positioning the Fed to start easing policy in September. The central bank's July monetary policy decision is due next week.
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.
Greg Boutle, head of US equity & derivative strategy at BNP Paribas, noted that the many factors at play helped to explain why markets were susceptible to periods of volatility, including this week.
"It's been a bit challenging for people to read what's going on because there is (portfolio) positioning, elections, CPI and the Fed, and earnings season, and these things are all pulling in slightly different directions," he said.
According to preliminary data, the S&P 500 (.SPX), gained 61.06 points, or 1.11%, to end at 5,460.28 points, while the Nasdaq Composite (.IXIC), gained 176.16 points, or 1.03%, to 17,357.88. The Dow Jones Industrial Average (.DJI), rose 658.54 points, or 1.66%, to 40,593.61.
Worries about Wall Street's growing dependence on a set of high-momentum stocks, whose valuations now appear inflated, have made underperforming sectors like mid- and small-cap stocks seem more attractive, now that early rate cuts seem likely.
Industrials (.SPLRCI), and Materials (.SPLRCM), were among the leaders across the S&P 500 sector indexes.
Among stocks boosted by earnings, Deckers Outdoor (DECK.N), jumped after it raised its annual profit forecast, while oilfield services firm Baker Hughes (BKR.O), climbed after beating estimates for second-quarter profit.
Norfolk Southern (NSC.N), soared after the rail operator reported second-quarter profit above Wall Street estimates thanks to robust pricing.
Medical device maker Dexcom (DXCM.O), slumped after cutting its annual revenue forecast.
Of the 206 companies in the S&P 500 that have reported second-quarter earnings, 78.6% beat analysts' expectations, LSEG data showed.
Reporting by Ankika Biswas and Lisa Mattackal in Bengaluru and David French in New York; Editing by Saumyadeb Chakrabarty, Pooja Desai and Richard Chang
