For the past few months, the stock market has been dominated by twin narratives: (1) the long-term viability of the AI trade and (2) the impact of the Iran war.
On a day in, day out basis, the narrative has rotated. A multi-billion-dollar AI-infrastructure collaboration might juice tech stocks one day. The next day that same group might rally because of data showing inflation is cooling.
They’ve also served as cover for one another. If a major chipmaker issues a disappointing sales forecast, that might be offset by a deescalation in US-Iran tensions.
Long story short, there’s usually something to either excite investors, or at least temper any negativity. And that’s helped keep major indexes up within shouting distance of record highs — albeit with some volatility along the way.
On Thursday, that volatility reared its angry head in a way that felt different, because the sell-off was a byproduct of both headwinds flaring up at the same time.
The trading session ended with the S&P 500 down 1.2% and the tech-heavy Nasdaq 100 losing nearly 2%. The damage was even deeper in AI-adjacent areas like the Magnificent 7, which collectively tanked 4%.
Ultimately, the episode amounted to two of the market’s most important catalysts combining to form a giant arrow lower for stocks. In many ways, the situation offers a glimpse at a worst-case scenario of sorts for stocks. Let’s unpack both parts:
1. The Iran war sends oil surging again
What’s happened: After a blissful and brief period back below pre-war levels, crude oil prices have surged back above $100 as the US and Iran conflict has reignited. This, in turn, has sent inflation expectations higher. Investors have been on high alert for this after seeing the impact of a prolonged Strait of Hormuz closure reflected in CPI data.
A hotter inflation forecast has investors starting to accelerate expectations for rate hikes, which have historically been kryptonite for stocks. This entire chain of events helps explain the market’s bad day on Thursday.
What’s next: As always, the ball is in the court of the Trump administration, and their negotiation counterparts from Iran. The market has shown itself to be desperate for a peace deal, and more than willing to price one in. All they need are some signs of progress, which have been scant to non-existent lately.
2. AI-trade investors decide they’re sick of all the spending
What’s happened: On Thursday, Alphabet and Tesla were the latest tech companies to find out that impatient traders are getting tired of capex spending and are instead looking for tangible results. Chipmakers including TSMC found this out earlier this earnings season in what now looks like a warning of what was to come.
Alphabet tumbled 7% after raising its spending forecast, cancelling out strong earnings and immense growth in its AI-focused Google Cloud business. Tesla, meanwhile, fell 15% after pledging more spending and missing profit estimates.
What’s next: The rest of the main Magnificent 7 hyperscalers — Meta, Microsoft, and Amazon — report earnings next week. It’s safe to say at this point that, no matter what numbers the company reports, none of it will matter if they boost capex spending. And since companies have been unabashed in their deployment, we could be looking at another series of AI-stock sell-offs.
