U.S. stocks closed higher on Thursday, with a powerful rally in semiconductor shares overpowering renewed fears that escalating U.S.-Iran hostilities could prolong the Middle East conflict and reignite inflation. The Nasdaq Composite led the charge, climbing 1.26% to close at 26,196.22 points, while the S&P 500 gained 0.84% to finish at 7,545.53 points and the Dow Jones Industrial Average added 0.40% to close at 52,559.45.

Chips Lead the Charge

The rally was driven almost entirely by strength in chip stocks, with the Philadelphia Semiconductor Index (PHLX) surging for a second straight positive session. Micron Technology was the standout, jumping sharply after unveiling plans to invest more than $250 billion in the U.S. through 2035 to capitalize on booming demand for memory chips tied to the AI buildout. The rally spread across the sector: Applied Materials gained roughly 5%, while Sandisk surged as much as 12%. Meta Platforms also rose about 1.4% after Reuters reported the company plans to begin manufacturing its own AI chips starting in September.

Not every tech name joined the party. IBM fell 2.7% and Microsoft slipped 0.7% after Bloomberg reported that Starbucks had turned to AI tools to reduce its reliance on both companies' software and services.

Geopolitics Still Looming Large

The gains came despite a fresh escalation in the Middle East. Iran said it struck U.S. military targets in Kuwait, Qatar, and Bahrain in response to U.S. strikes against Iranian targets on Wednesday, after President Trump declared the fragile U.S.-Iran ceasefire "over" following renewed attacks on commercial shipping near the Strait of Hormuz. U.S. Central Command confirmed it had carried out fresh strikes on Iran and later said it completed an additional round.

Crude oil, which had spiked sharply on the initial escalation news, pared some of its gains after Trump said he had called Iranian officials to try to broker a deal — helping ease pressure on oil futures and taking some edge off inflation worries by session's end. Still, Wells Fargo Investment Institute's Mason Mendez cautioned that "any assumption of a swift return to normalized Persian Gulf exports is certainly being challenged," warning that low global oil reserves and inventories could keep a geopolitical risk premium embedded in prices if tensions escalate further.

Is the AI Rally Still on Solid Ground?

Thursday's action also reignited a broader debate about how durable the AI-driven rally that's powered Wall Street to record levels in 2026 really is. Ross Mayfield, investment strategy analyst at Baird, framed the moment succinctly: "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."

In other words, even as chip stocks powered Thursday's gains, strategists are increasingly framing the market's next moves as a tug-of-war between AI-driven enthusiasm and the very real risk that a widening Middle East conflict could push oil prices and interest rates higher — undermining the conditions that have let the AI trade broaden beyond a handful of mega-cap names.

What Investors Are Watching Next

Markets remain on alert heading into Friday, with traders tracking several threads simultaneously: the trajectory of U.S.-Iran tensions and any further disruption to Strait of Hormuz shipping, oil price movements, ongoing Q2 corporate earnings reports, jobless claims and broader labor market data, and any fresh signals from the Federal Reserve on the path of interest rates. For now, Thursday's session suggests that as long as chip and AI-related demand stays strong, Wall Street is willing to look past geopolitical turbulence — but strategists warn that calculus could shift quickly if oil prices or bond yields break higher in a more sustained way.