US STOCKS-Nasdaq closes higher ahead of heavy week of earnings

Updates to market close

By Lisa Pauline Mattackal, Purvi Agarwal and Carolina Mandl

Oct 25 (Reuters) - The Nasdaq ended higher on Friday, driven by megacap shares, as investors awaited quarterly results from some of Wall Street's biggest companies next week.

Tesla TSLA.O shares rose a day after surging 22% on the electric vehicle maker's sales forecast. Apple AAPL.O and Microsoft MSFT.O also firmed.

"Tesla numbers helped rekindle some optimism of investors that the Magnificent Seven rally is not over," said Brian Jacobsen, chief economist at Annex Wealth Management.

He was referring to the group of interest rate-sensitive technology stocks which have surged on enthusiasm for artificial intelligence. Chip heavyweight Nvidia NVDA.O gained, briefly overtaking Apple AAPL.O as the world's most valuable company based on its shares.

The benchmark 10-year Treasury note yield edged higher as investors awaited employment data next week for clues on the likely path of Federal Reserve interest rate cuts. Earlier this week, the yield reached a three-month high of 4.26%, weighing on the stock market.

According to preliminary data, the S&P 500 .SPX lost 1.86 points, or 0.03%, to end at 5,808.00 points, while the Nasdaq Composite .IXIC gained 103.87 points, or 0.56%, at 18,519.36. The Dow Jones Industrial Average .DJI fell 263.21 points, or 0.62%, to 42,111.15.

The Dow slumped on a loss in banking shares and a fall in McDonald's MCD.N as the fast-food chain copes with an E. coli outbreak linked to its hamburgers.

"Banks have rallied as (U.S. presidential candidate Donald) Trump's odds (of winning) increased, so it seems investors are taking some profits," said Michael Rosen, chief investment officer at Angeles Investments.

Regional lender New York Community Bancorp NYCB.N dropped after reporting its fourth straight quarterly loss , primarily due to its commercial real estate loans.

Continued uncertainty around the U.S. election has made investors cautious.

Equities have been unsettled this week by a rapid rise in yields as bets on rate cuts by the Fed unraveled on expectations of a stronger economic outlook.

"The Fed perhaps got a little too dovish ahead of the data. ... The growth and inflation numbers don't necessarily justify easing behavior," said Arnim Holzer, global macro strategist at Easterly EAB Risk Solutions.

Investors are still pricing in another 25-basis-point rate cut at the Fed's November meeting and about two rate cuts by the end of the year, LSEG data showed.

The week starting Oct. 28, the final stretch before the Nov. 5 U.S. presidential election, is crucial for Wall Street. This is when results from megacap tech firms including Alphabet GOOGL.O, Apple AAPL.O and Microsoft MSFT.O are due, along with the October U.S. nonfarm payrolls report.

"Next week looms large with five of the Magnificent Seven stocks reporting and a host of tier one economic releases spanning third quarter," said Paul Eitelman, chief investment strategist for North America at Russell Investments.

Capri Holdings CPRI.N slumped after a U.S. judge blocked a pending merger between the fashion holding company and handbag maker Tapestry TPR.N. Shares of Tapestry rose.

Most of the 11 S&P sectors closed down.

(Reporting by Lisa Mattackal and Purvi Agarwal in Bengaluru; Editing by Pooja Desai, Saumyadeb Chakrabarty, Maju Samuel and Richard Chang)

((LisaPauline.Mattackal@thomsonreuters.com))