Global markets are holding their breath as investors await earnings reports from major tech companies, with U.S. equities caught in a crossfire of geopolitical risks and a potential revaluation of artificial intelligence stocks. According to Seeking Alpha analyst Damir Tokic, the market is currently dominated by two major themes: an oil price-driven inflation shock and AI-related trading, with tech stocks remaining in a cautious holding pattern ahead of critical financial results.
"Currently, the technology sector is in a wait-and-see mode, while other sectors are experiencing sell-offs," Tokic stated. "Under the dual pressures of rising oil prices and approaching tech earnings, the downside risks facing the S&P 500 index cannot be ignored."
Oil Prices Break Through $90, Inflation Fears Resurface
An escalation in the Middle East has become the biggest variable for markets this week. The U.S. military conducted strikes against Iran for the tenth consecutive night, while Iran retaliated by targeting several U.S. bases. Shipping through the Strait of Hormuz has been significantly impacted, with data showing only a handful of vessels transited the waterway last Sunday. Iran announced the closure of the Strait of Hormuz once again, and the U.S. simultaneously reinstated a maritime blockade on Iran.
Supply risks have propelled international oil prices sharply higher. On July 17, WTI futures settled at $82.5 per barrel, while Brent crude futures closed at $88.1 per barrel, representing increases of 18.7% and 20.8%, respectively, from the end of June. By July 20, Brent crude even briefly surpassed $91 per barrel.
The sustained climb in oil prices has reignited market concerns about inflation and potential interest rate hikes. Shane Oliver, Head of Investment Strategy at AMP, warned that if the Strait of Hormuz remains closed long-term and the conflict escalates further, "oil prices may need to rise to around $150 per barrel to match the supply decline by suppressing demand."
AI Trading Faces a Critical Test: Alphabet Earnings as Key Bellwether
Beyond the oil price shock, AI-related trading is facing a crucial test. Alphabet Inc (NASDAQ: GOOGL), the parent company of Google, is scheduled to report its second-quarter earnings after the U.S. market closes this Wednesday. Alphabet is widely seen as a frontrunner in the AI race, with its first-quarter revenue exceeding $100 billion for the third consecutive quarter, rising 22% year-over-year to $109.9 billion, and net profit surging 81% to a record $62.6 billion. Google Cloud was a standout performer, with revenue growing 63% to $20 billion, marking the fastest growth among major cloud service providers.
However, market focus has shifted to AI capital expenditures. Alphabet's Q1 capital expenditure soared 107% year-over-year to $35.7 billion, with forecasts for fiscal 2026 already revised up to between $180 billion and $190 billion. Kevin Mahn, Chief Investment Officer at Hennion & Walsh Asset Management, cautioned that any signal from Alphabet about trimming its AI investment budget could trigger a chain reaction across the entire AI industry.
Tokic noted that any sign of a stall in AI capital spending could accelerate what he terms the "AI bubble burst"—an expectation already being priced into semiconductor stocks. Indeed, chip stocks have already undergone a significant correction. The Philadelphia Semiconductor Index fell about 10% last week, its largest weekly drop in over a year, and has retreated more than 20% from its June all-time high, officially entering a technical bear market.
Data from Turning Point Market Research shows the percentage of semiconductor stocks showing a short-term "dual trend" buy signal has plummeted from 91% a month ago to just 24%, marking the most severe deterioration since 2010.
The decline in global AI and semiconductor stocks is creating a synchronized effect. Japan's Nikkei Semiconductor Stock Index has fallen 30% from its peak, while South Korea's KOSPI index has dropped 25% since its June 22 high, with over 1.2 million retail accounts facing margin calls due to leveraged ETF liquidations.
Persistent Inflation: A 'Policy Choice' Rather Than Economic Inevitability
Moody's Analytics Chief Economist Mark Zandi issued a warning from a policy perspective. He pointed out that persistently high inflation—currently running around 3.5%, well above the Federal Reserve's 2% target—is largely a result of policy choices. Although the U.S. June CPI year-over-year rate has retreated from a high of 4.2% to 3.5%, with core CPI dropping to 2.6%, the Middle East situation is once again pushing energy prices higher, leaving the inflation outlook highly uncertain.
Zandi previously warned that if inflation expectations continue to rise, the Federal Reserve may be forced to hike rates further, even at the risk of triggering a full-blown recession. Futures market data indicates traders are betting on a cumulative rate hike of approximately 29 basis points by year-end, with the probability of a September hike around 60%.
Concurrently, the yield on the U.S. 30-year Treasury bond has re-crossed the psychological 5% threshold, a level that often attracts capital flow from equities into fixed-income assets.
Comments