Stocks Fall as Crude Oil Prices Soar and Alphabet Sparks AI Spending Concerns
Stocks Fall as Crude Oil Prices Soar and Alphabet Sparks AI Spending Concerns.
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The S&P 500 Index ($SPX) (SPY) today is down -0.80%, the Dow Jones Industrial Average ($DOWI) (DIA) is down -0.66%, and the Nasdaq 100 Index ($IUXX) (QQQ) is down -1.20%. September E-mini S&P futures (ESU26) are down -0.77%, and September E-mini Nasdaq futures (NQU26) are down -1.10%.
Stock indexes are trading lower today amid a double whammy of higher oil prices and a decline of more than -5% in Alphabet following its earnings report after Wednesday's close. Alphabet raised its capital spending forecast for this year to $205 billion from $190 billion, spending more than double its 2025 capital spending and raising concern that the company will struggle to earn a sufficient return on its outsized AI investment. Tesla is down more than -10% today after its earnings report late Wednesday also showed a surge in capital spending.
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Meanwhile, WTI crude oil prices (CLU26) are up more than +5% today after the Iran-backed Houthis launched a missile and drone attack on two Saudi Arabian oil tankers in the Red Sea, expanding the oil disruptions beyond the Strait of Hormuz and threatening oil shipments in the Red Sea. The Houthis have vowed to blockade shipping linked to Saudi Arabia and warned shipowners against calling at the nation's ports. The move threatens Saudi oil exports from Yanbu, a Red Sea hub that the Saudi's are using to ship crude since the war brought shipping through the Strait of Hormuz to a near halt. President Trump said Tuesday that if there is a blockade in the Red Sea, the US "will take care of it." Meanwhile, the US and Iran exchanged attacks for the 12th straight day, and the US maintained its blockade of Iranian oil shipments in the Persian Gulf.
US weekly initial unemployment claims in the week ended July 18 fell by -22,000 to 187,000, which showed a stronger labor market than expectations for a slight increase to +210,000. Continuing claims fell by -2,000 to 1.796 million, showing a stronger labor market than expectations for a rise to 1.809 million.
The Chicago Fed's June National Activity Index rose to -0.02, which was weaker than the expected rise to zero from May's revised -0.19.
The outlook for strong Q2 earnings, which began in earnest this week, is a bullish factor for stocks. Forecasts compiled by Bloomberg Intelligence suggest Q2 earnings may increase by +23%, close to Q1's blowout earnings of +30%, which was more than double the +12% analysts had expected. AI spending is expected to account for most of earnings, with AI infrastructure stocks set to contribute nearly 60% of the S&P 500's earnings-per-share growth in Q2. So far, earnings results have been positive as 89% of the S&P 500 companies that reported Q2 earnings results have beaten estimates, according to data compiled by Bloomberg.
The markets are discounting a 36% chance of a +25 bp rate hike at the next FOMC meeting on July 28-29.
Overseas stock markets are mixed. The Euro Stoxx 50 is down -1.14%. China's Shanghai Composite on Thursday closed up +0.25%. Japan's Nikkei-225 Stock Average closed up +0.46%.
September 10-year T-notes (ZNU6) today are down -11 ticks, and the 10-year T-note yield rose +5.5 bp to 4.710%. Sep T-notes today tumbled to a 1.5-year nearest-futures low, and the 10-year T-note yield rose to a new 1.5-year high. T-notes are trading lower on today's sharp +5% rise in WTI crude oil prices, which pushed the 10-year breakeven inflation expectations rate up +2.3 bp to a 5-week high of 2.284%. T-note prices were also undercut by today's US unemployment claims report, which showed a stronger-than-expected labor market. The Treasury will sell $21 billion of 10-year TIPS later today.
European government bond yields are trading higher. The 10-year German bund yield is up +2.8 bp to 3.199%, edging to a new 15-year high. The 10-year UK gilt yield is up +6.0 bp at 5.094%, posting a new 2-month high.
The ECB today left its key deposit rate unchanged at 2.25%, in line with market expectations. The ECB said it left rates unchanged, awaiting further data to determine whether additional rate hikes are necessary to address the inflation outlook. The markets are discounting a 93% chance of a +25 bp ECB rate hike at its next policy meeting on September 10.
The sharp declines in Alphabet (GOOGL)and Tesla (TSLA)after their earnings reports late Wednesday are dragging down other mega-cap tech stocks. The rest of the Magnificent 7 are all trading lower, led by a decline of more than -3% in Amazon (AMZN) and a decline of more than -2% in Meta Platforms (META).
Software stocks are under pressure today, led by declines of about -2% in IBM (IBM), Oracle (ORCL), and Salesforce (CRM).
Chipmakers are trading mostly lower, led by a decline of more than -3% in Texas Instruments (TXN)and declines of more than -2% in ON Semiconductor (ON) and Microchip Technology (MCHP).
Energy stocks and service providers are trading higher on today's surge in oil prices. Diamondback Energy (FANG), Devon Energy (DVN), ConocoPhillips (COP), and Occidental Petroleum (OXY) are all trading up more than +2%.
