Updates with market close

By Noel Randewich and Ragini Mathur

July 9 (Reuters) - The Nasdaq ended sharply higher on Thursday, as Micron Technology fueled a rally in chip stocks that eclipsed fears that renewed U.S. and Iranian attacks might prolong the Middle East conflict and fuel inflation.

Tehran said it hit U.S. military targets in Kuwait, Qatar and Bahrain following U.S. strikes against Iran on Wednesday.

The PHLX chip index .SOX surged for a second straight positive session.

Micron Technology MU.O jumped after the company laid out plans to invest more than $250 billion in the U.S. through 2035, to benefit from demand for memory chips to supply the boom in artificial intelligence.

Applied Materials AMAT.O and Sandisk SNDK.O also surged.

AI-related stocks have been volatile lately as investors worried about the sustainability of a rally that has helped Wall Street reach record levels in 2026.

"This is still very much an AI bull market. For a bit, it was starting to broaden out, but that's contingent on oil prices and interest rates staying anchored, and with this flare-up in the Middle East, that calls that part of the bull market into question," said Ross Mayfield, investment strategy analyst at Baird in Louisville, Kentucky.

Meta Platforms META.O rose after Reuters reported that the company plans to manufacture AI chips starting in September.

According to preliminary data, the S&P 500 .SPX gained 59.12 points, or 0.79%, to end at 7,541.83 points, while the Nasdaq Composite .IXIC gained 328.11 points, or 1.27%, to 26,198.76. The Dow Jones Industrial Average .DJI rose 133.31 points, or 0.25%, to 52,481.70.

With quarterly reporting season set to get under way, analysts on average expect S&P 500 earnings to increase 24% year-over-year, with technology companies accounting for much of that increase, according to LSEG I/B/E/S.

The S&P 500 is trading at about 20 times expected earnings, down from 21 a month ago.

The number of Americans filing claims for unemployment benefits fell last week, suggesting the labor market remained stable despite a slowdown in job growth in June.

The Federal Reserve kept interest rates unchanged at its June meeting, under new Chair Kevin Warsh, but minutes released on Wednesday showed a few policymakers saw a case for raising borrowing costs before ultimately agreeing to hold steady.

Traders are pricing in a likely 25-basis-point rate hike by the Fed's December meeting, according to CME's FedWatch tool.

PepsiCo PEP.O fell despite the snacks and soda giant beating second-quarter revenue estimates.

Costco Wholesale's COST.O shares sank to a six-month low after the retailer reported decelerating comparable sales for June.