Microsoft and Countrywide drive stock rally

By Jennifer Coogan

NEW YORK (Reuters) - Stocks rallied on Friday after Microsoft's upbeat outlook boosted the three major indexes and a profit forecast from lender Countrywide Financial buoyed the struggling financial sector.

Stocks extended their gains as the weekend approached, in a sign investors are expecting the Federal Reserve to cut interest rates when it meets next week, analysts said.

Microsoft (MSFT.O: Quote, Profile, Research, Stock Buzz) lifted its full-year forecasts late on Thursday and reported quarterly profit that beat analysts expectations. Countrywide CFC.N, the largest U.S. mortgage lender, on Friday reported a quarterly loss, but it forecast a profit in the fourth quarter as it slashes jobs.

"The earnings from Microsoft certainly helped, but the fact is investors are looking forward to next week," said Paul Nolte, director of investments at Hinsdale Associates, in Hinsdale Illinois. "We've skated through September and October. November through May tends to be the best part of the year for stocks."

The Dow Jones industrial average .DJI was up 134.78 points, or 0.99 percent, to end at 13,806.70. The Standard & Poor's 500 Index .SPX was up 20.88 points, or 1.38 percent, at 1,535.28. The Nasdaq Composite Index .IXIC was up 53.33 points, or 1.94 percent, at 2,804.19.

For the week, the Dow added 2.11 percent, the S&P 500 climbed 2.31 percent and the Nasdaq rose 2.90 percent.

Shares of Yahoo (YHOO.O: Quote, Profile, Research, Stock Buzz) were the next biggest gainer on Nasdaq after Microsoft. The search engine is buying a big stake in Alibaba.com, China's biggest e-commerce site. Yahoo already has a 40 percent stake in the firm's parent Alibaba Group.

Yahoo's stock jumped 7.3 percent to $33.63. Trading in bullish options on Yahoo's stock was extremely brisk.