Global stock markets experienced a downturn as escalating geopolitical tensions in the Middle East, particularly the US-Iran conflict, pushed Brent crude oil prices above $100 a barrel, sparking fears of increased inflation. This oil surge, the highest since May, contributed to global bond yields rising, with traders now pricing in a 75% chance of a Federal Reserve rate hike by September. The S&P 500 dropped 1.2%, the Nasdaq 100 fell 1.9%, and the Dow Jones Industrial Average declined 1%. This marked the S&P 500's largest drop in a month, with a gauge of megacap stocks experiencing their worst day since April 2025.
A significant factor in the stock decline was investor unease over the substantial capital expenditure by major artificial intelligence companies. Alphabet Inc. saw its shares sink 6.9% after raising its capital spending forecast to as much as $205 billion for the year, an increase from an earlier projection of $190 billion and more than double its 2025 outlay. This news, despite a strong earnings report, signaled concerns about whether these massive AI investments will yield adequate returns. Tesla Inc. also tumbled 15% after reporting a profit drop, even with strong electric-vehicle deliveries, and experiencing its first cash burn in two years.
Other tech giants like Meta Platforms Inc., Microsoft Corp., and Amazon.com Inc. had previously indicated plans to spend up to $725 billion this year on AI ambitions. This significant cash burn by hyperscalers, particularly Alphabet and Tesla, has made investors question the profitability of these ventures. Morgan Stanley's Daniel Skelly noted that the market, already volatile from a semiconductor correction, was facing additional pressure from these AI capital expenditure concerns and surging oil prices amidst renewed geopolitical uncertainty.
The rising oil prices, fueled by attacks on Saudi oil tankers in the Red Sea and concerns about the Strait of Hormuz, have intensified worries about global supply disruptions and inflation. Wells Fargo Institute's Sameer Samana highlighted that while oil prices are expected to normalize, the current situation presents significant risks. The elevated oil costs are also impacting specific sectors, with American Airlines Group Inc. cutting its full-year guidance for the first time in three months due to high fuel prices.
