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* S&P 500 hits record high
* Microsoft touches all-time high on Pentagon cloud contract win
* Tiffany surges on LVMH's $14.5 bln bid
* Spotify jumps on surprise quarterly profit
* Indexes up: Dow 0.66%, S&P 0.62%, Nasdaq 0.65% (Updates to open)
By Arjun Panchadar
Oct 28 (Reuters) - The benchmark S&P 500 index hit a record high on Monday as a possible trade deal between the U.S. and China, and rising bets on a third rate cut by the Federal Reserve, bolstered investor optimism.
Meanwhile, shares of Microsoft Corp powered the three main stock indexes. The tech giant's shares touched an all-time high and were last up 2.6% after it won the Pentagon's $10 billion cloud computing contract, beating Amazon.com Inc . Amazon shares dropped nearly 1%.
The other two major indexes are less than 1% below their record levels. President Donald Trump said on Monday he expected to sign a significant part of the trade deal with China ahead of schedule but did not elaborate on the timing.
This added to Friday's optimism when Washington said it was "close to finalizing" some parts of a trade agreement with China. Beijing confirmed on Saturday that "technical consultations" on some parts of the agreement were basically completed.
"Markets seem convinced the first deal will get done and that negotiations are progressing on the next deal," said Edward Moya, senior market analyst at Oanda.
The news comes as a relief to investors who have been grappling with the fallout from the trade war, which was reflected in some of the dismal economic data this month.
This has raised odds for a quarter percentage point cut in U.S. borrowing costs to 94% from 49% last month. The Fed will announce its policy decision at the end of its two-day meeting on Wednesday.
The third-quarter earnings season has managed to ease some concerns related to impact of the trade tensions on Corporate America, with over 78% of the 199 S&P 500 companies that have reported so far surpassing profit expectations.
Investors are now waiting for earnings from heavyweights this week, including Apple Inc, Alphabet Inc and Merck & Co Inc.
At 9:56 a.m. ET the S&P 500 was up 18.64 points, or 0.62%, at 3,041.19. The Dow Jones Industrial Average was up 178.09 points, or 0.66%, at 27,136.15 while the Nasdaq Composite was up 53.44 points, or 0.65%, at 8,296.56.
Nine of the 11 major S&P sectors were trading higher, with the technology sector providing the biggest boost.
Among other stocks, Tiffany & Co surged 29.02% after Louis Vuitton owner LVMH made a $120 per share offer to buy the U.S. luxury jeweler.
AT&T Inc rose 4.81% after the U.S. wireless carrier said it would add two new board members and consider selling off up to $10 billion worth of non-core businesses next year.
Spotify Technology SA gained 11.29% after the music streaming company posted a surprise quarterly profit and beat revenue estimates.
Advancing issues outnumbered decliners by a 2.47-to-1 ratio on the NYSE and a 2.56-to-1 ratio on the Nasdaq.
The S&P index recorded 34 new 52-week highs and no new lows, while the Nasdaq recorded 81 new highs and 16 new lows. (Reporting by Arjun Panchadar and Medha Singh in Bengaluru; Editing by Anil D'Silva)