Geopolitical tensions and AI spending concerns contribute to stock market decline

Stock Market Performance

Last week marked the second consecutive week of losses for the stock market. The S&P 500 index declined by 0.6%, while the technology-heavy Nasdaq composite saw a larger drop of 2.1%.

Geopolitical Tensions and Oil Prices

Oil prices surged for the third consecutive week, driven by escalating tensions in the Middle East. West Texas Intermediate crude increased over 8%, and international Brent crude rose nearly 10%. This surge was influenced by statements from President Trump regarding Iran and claims of attacks on Saudi oil tankers by Houthi militants, pushing Brent crude above $100 a barrel.

The increase in crude oil prices reignited inflation concerns, leading the 10-year Treasury yield to its highest level since January 2025. This development increased the probability of an interest rate hike by the Federal Reserve, with markets pricing in a nearly 35% chance of a quarter-point increase, up from 13% the previous week.

Investor Scrutiny of AI Spending

Artificial intelligence remained a significant theme in earnings reports, but investors demonstrated a shift in their expectations. They are now less willing to reward substantial spending on AI without a clear path to profitability.

Alphabet, the parent company of Google, exemplified this trend. Despite reporting better-than-expected revenue and earnings, and 82% year-over-year growth in Google Cloud, Alphabet's shares fell 7%. This decline occurred after the company increased its capital expenditures outlook, now expecting to spend between $195 billion and $205 billion this year, with further increases signaled.