Updates to midafternoon trading, adds analyst comment

By Stephen Culp and Ragini Mathur

NEW YORK, May 13 (Reuters) - The S&P 500 and the Nasdaq gained ground on Wednesday with a boost from artificial intelligence-related tech shares, which helped markets look past hotter-than-expected inflation data and the growing probability that the Federal Reserve will hold to its restrictive monetary policy for the foreseeable future.

The S&P 500 and the Nasdaq reversed earlier declines and were on track to notch fresh record closing highs, as chip stocks .SOX rebounded from Tuesday's decline.

The PHLX Semiconductor index .SOX rebounded from Tuesday's losses, rising 2.8% and setting a course for an all-time closing high, while six of the Magnificent Seven group of AI-related megacaps were up between 1.3% and 3.8%.

A report from the Labor Department showed producer prices jumped by 1.4% last month, the largest monthly increase in four years. While the surge was largely driven by crude supply disruption due to the closure of the Strait of Hormuz, the report showed soaring oil prices are beginning to seep in to other segments of the economy, and suggested that rising inflation is becoming pervasive.

Recent inflation data is dousing any remaining hopes for a near-term rate cut from the Federal Reserve. In fact, Boston Fed President Susan Collins said on Wednesday that a rate hike could be in the cards if inflation pressures do not subside.

"You've got these somewhat conflicting narratives between the strong earnings story and inflation risks ... two significant catalysts, side-by-side," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Southfield, Michigan. "Since the beginning of April the earnings narrative has won out."

"I would just be careful to not overlook the risk of a more prolonged period of inflation and elevated interest rates," Baird said, adding that the PPI report "reinforces the inflation risk narrative and at least makes the case for a longer pause at the Fed."

TRUMP, MUSK, HUANG AND XI

U.S. President Donald Trump arrived in Beijing, along with an entourage that included Nvidia NVDA.O Chief Executive Officer Jensen Huang and Elon Musk, ahead of a two-day summit with his Chinese counterpart Xi Jinping. Topics on the agenda include urging Xi to "open up" to U.S. businesses and maintaining a fragile trade truce. Trump will also seek to bolster his approval rating, which has been battered by the Iran war and resulting surge in energy prices.

Nvidia and Tesla shares advanced 2.4% and 3.5%, respectively.

The meeting is set to convene amid China's warnings regarding U.S. arms sales to Taiwan and criticism over proposed legislation that would make it harder for Chinese chipmakers to produce AI semiconductors.

The Dow Jones Industrial Average .DJI fell 90.72 points, or 0.18%, to 49,669.84, the S&P 500 .SPX gained 42.43 points, or 0.57%, to 7,443.39 and the Nasdaq Composite .IXIC gained 292.20 points, or 1.12%, to 26,381.48.

Among the 11 major sectors of the S&P 500, communication services .SPLRCL and tech .SPLRCT enjoyed the largest percentage gains, while utilities .SPLRCU were the biggest laggards.

Morgan Stanley raised its annual target for the S&P 500 index to 8,000 from 7,800, saying U.S. stocks have enough room to rally as companies continue to post strong earnings.

Nebius Group NBIS.O jumped 18.3% after the AI cloud firm reported a nearly eightfold rise in quarterly revenue.

EchoStar SATS.O climbed 3.9% the day after the Federal Communications Commission's approval of the $40 billion sale of wireless spectrum to SpaceX and AT&T T.N.

Cryptocurrency firms Coinbase COIN.O and Strategy MSTR.O slid 3.4% and 2.6%, respectively, dragged down by weakness in bitcoin BTC= and ethereum ETH=.

Declining issues outnumbered advancers by a 1.36-to-1 ratio on the NYSE. There were 301 new highs and 156 new lows on the NYSE.

On the Nasdaq, 2,170 stocks rose and 2,461 fell as declining issues outnumbered advancers by a 1.13-to-1 ratio.

The S&P 500 posted 31 new 52-week highs and 46 new lows while the Nasdaq Composite recorded 99 new highs and 181 new lows.