Stocks Decline as Oil Prices Surge and Alphabet Reports Spending Concerns
U.S. stock markets faced a notable downturn on Thursday, with the S&P 500 Index declining by 1.49%, the Dow Jones Industrial Average falling 1.11%, and the Nasdaq 100 dropping 2.26%. This decline was largely attributed to a combination of soaring crude oil prices and a significant 7% drop in Alphabet's stock following its earnings report released after the market closed on Wednesday. Alphabet announced an increase in its capital spending forecast for the year, raising it to $205 billion from $190 billion, which has sparked concerns about the company's ability to generate adequate returns on its substantial investments in artificial intelligence. Tesla's stock also saw a dramatic decline of 14% after its earnings report, which indicated a rise in capital spending and raised questions about CEO Elon Musk's focus on AI and robotics.
Crude oil prices surged by more than 6% on Thursday after the Iran-backed Houthis launched missile and drone attacks on two Saudi oil tankers in the Red Sea. This escalation has raised fears of further disruptions to oil shipments, particularly as Brent crude prices surpassed $100 per barrel for the first time since May. In response, President Trump stated that he holds Iran responsible for the attacks and hinted at the possibility of a significant military response.
The Houthis have threatened to blockade shipping linked to Saudi Arabia, warning shipowners against entering the nation's ports. This situation poses a risk to Saudi oil exports from Yanbu, a key shipping hub, as the ongoing conflict has severely restricted shipping through the Strait of Hormuz. Concurrently, the U.S. and Iran have engaged in a series of attacks over the past 12 days, with the U.S. maintaining its blockade of Iranian oil shipments in the Persian Gulf.
In economic news, U.S. weekly initial unemployment claims fell by 22,000 to 187,000, indicating a stronger labor market than anticipated. Continuing claims also decreased slightly, suggesting resilience in the job market. However, the Chicago Fed’s National Activity Index showed a slight decline, and the Kansas City Fed’s manufacturing activity index fell short of expectations.
Despite the current market volatility, analysts remain optimistic about Q2 earnings, with forecasts suggesting a potential 23% increase. AI spending is expected to play a significant role in this growth, particularly among infrastructure stocks. So far, 89% of S&P 500 companies that have reported earnings have exceeded estimates, contributing to a generally positive outlook.
The markets are currently pricing in a 36% chance of a 25 basis point rate hike at the upcoming Federal Open Market Committee meeting. Overseas, stock markets closed mixed, with the Euro Stoxx 50 down 1.69% while China's Shanghai Composite and Japan's Nikkei-225 posted slight gains.
In the bond market, September 10-year T-notes fell, with yields rising to a 1.5-year high, influenced by the spike in oil prices and stronger-than-expected labor market data. European government bond yields also increased, with the 10-year German bund yield reaching a new 15-year high.
The European Central Bank held its key deposit rate steady at 2.25%, awaiting further data to assess the need for future rate hikes. ECB President Christine Lagarde noted that risks to the inflation outlook remain elevated.
The declines in Alphabet and Tesla significantly impacted other major tech stocks, with Amazon and Meta Platforms also closing lower. Software and chipmaker stocks faced pressure, while energy stocks generally benefited from the rise in oil prices. American Airlines and T-Mobile saw substantial drops in their stock prices following disappointing earnings reports and guidance adjustments.
