The S&P 500 barely advanced on Friday, marking its second consecutive weekly loss. The technology index, particularly chip stocks, underperformed the broader market, falling 0.88%. This weakness stemmed from investor anxiety over the massive capital outlays required for artificial intelligence (AI) ahead of upcoming megacap earnings reports. Analysts like Peter Andersen of Andersen Capital Management noted that investors are questioning when AI spending will translate into actual profits, despite recent years of heavy investment in the sector.
In contrast, the Dow Jones Industrial Average rose 0.46% to 51,947.25, while the Nasdaq Composite fell 0.64% to 24,975.82. For the week, the Dow dropped 0.4%, the S&P 500 fell 0.6%, and the Nasdaq lost 2%. Real estate was the strongest sector within the S&P 500, advancing 2.4%, with Digital Realty Trust rallying 11% after raising its full-year forecast for funds from operations.
Falling crude oil futures provided some relief to Wall Street, with Brent crude dropping as much as 7.4% to below $90 a barrel. This decline was attributed to traders booking profits after a significant rally and reports that China was pushing for a resumption of stalled US-Iran peace talks, easing Middle East hostilities. US benchmark crude also dropped 7% to $83.06 per barrel. Analysts, including Stephen Innes of SPI Asset Management, highlighted that the sharp retreat in oil loosened the "geopolitical knot" that had been tightening around financial markets for most of July.
Upcoming corporate earnings reports from megacap technology companies, including Microsoft Corp. and Meta Platforms on Wednesday, followed by Apple Inc. and Amazon.com Inc. on Thursday, are expected to be pivotal. These reports will shed light on the sustainability of profits amid heavy spending on AI infrastructure. The market has been punishing AI capital expenditure guidance throughout July, even when underlying numbers beat expectations, indicating a shift in investor sentiment regarding the monetization of AI investments.
The broader market context includes concerns over potential Federal Reserve interest rate hikes due to inflation fueled by earlier oil price surges. The ongoing geopolitical situation, despite the recent de-escalation, and new tariffs announced by the Trump administration also contribute to market uncertainty. Swings in oil prices, described as a "fastest-moving tax on the global economy," can significantly impact consumer and corporate spending, influencing financial markets as a whole.
