Updates to afternoon trading, adds comment by fund manager

By Saeed Azhar, Twesha Dikshit and Utkarsh Hathi

May 28 (Reuters) - The S&P 500 and the Nasdaq extended gains on Thursday, briefly hitting intraday record highs, after news reports said the U.S. and Iran had reached a deal, while investors also digested key inflation data.

The news was first reported by Axios, which said that negotiations on Iran's nuclear program would be held during the 60-day truce period, but that the plan still needed the approval of President Donald Trump.

"Traders are on a hair trigger with the back-and-forth on deal news, and have been leaning long to avoid getting trampled by a better-than-expected outcome. The harder part is that the inflationary forces may not abate as fast as markets want," said Jamie Cox, managing partner at Harris Financial Group.

Economic data showed U.S. inflation increased at its fastest pace in three years in April, driven by higher energy prices amid the Iran war.

Meanwhile, U.S. GDP for the first quarter was revised lower to a 1.6% annualized increase, with momentum expected to slow this quarter.

At 2:04 p.m. EDT, the Dow Jones Industrial Average .DJI fell 19.74 points, or 0.04%, to 50,625.05, the S&P 500 .SPX gained 45.63 points, or 0.61%, to 7,565.99 and the Nasdaq Composite .IXIC gained 250.65 points, or 0.94%, to 26,925.38.

The S&P 500 healthcare index .SPXHC gained 1.3%. Eli Lilly LLY.N advanced 3.9% after CVS Health CVS.N said it would restore the drugmaker's weight-loss injection, Zepbound, to its coverage and add its newly approved obesity pill Foundayo.

Tech shares .SPLRCT also moved almost 1.6% higher. Microsoft MSFT.O gained 3.8% after news website the Information reported the company would release a new coding model next week.

Marvell Technology MRVL.O rose 3.6% after UBS raised its target price to $230 from $195.

The company's shares have more than doubled so far this year.

Snowflake SNOW.N soared 38% after the data analytics firm lifted its annual product revenue forecast and announced a five-year AI infrastructure deal worth $6 billion with Amazon Web Services AMZN.O.

Peers Datadog DDOG.O and MongoDB MDB.O rose 3.5% and 11.7%, respectively.

Five of the 11 main S&P 500 sectors were in the green.

Renewed confidence in AI and earnings growth momentum have underscored the recent rally despite the Middle East tensions, which have increased inflationary expectations.

"Markets continue to look through these risks because the global economy and corporate earnings remain relatively resilient," said Jitania Kandhari, deputy CIO, solutions and multi-assets, at Morgan Stanley Investment Management.

"Geopolitical instability could ultimately accelerate spending in areas tied to AI, including cybersecurity, defense technology, energy infrastructure and supply-chain resiliency, reinforcing the long-term investment case."

While the S&P 500 is trading at roughly 21 to 22 times forward earnings versus a trailing 10-year average of 19.7 times, investors are less concerned because earnings expectations are rising faster than stock prices, Kandhari said.

Among other movers, Dollar Tree DLTR.O climbed 18% after the discount retailer lifted its full-year profit forecast, while Best Buy BBY.N also added 18% after the electronics vendor forecast second-quarter sales above estimates.

Drone companies rose after the Wall Street Journal reported that the Trump administration was in talks to fund drone firms. Unusual Machines UMAC.A jumped 67%.

Advancing issues outnumbered decliners by a 1.63-to-1 ratio on the New York Stock Exchange. There were 402 new highs and 87 new lows on the NYSE.

On the Nasdaq, 3,030 stocks rose and 1,757 fell as advancing issues outnumbered decliners by a 1.72-to-1 ratio.

The S&P 500 posted 15 new 52-week highs and 10 new lows while the Nasdaq Composite recorded 112 new highs and 63 new lows.