Market sentiment is under pressure as investors worry that the ongoing expansion of artificial intelligence spending may fail to yield proportionate returns. Although Google parent company Alphabet reported strong earnings, it did not fully alleviate investor concerns. Meanwhile, crude oil prices have risen for a fifth consecutive session, pushing bond yields higher. Additionally, traders are positioning for the possibility that the European Central Bank may signal a more hawkish policy stance later today.
As of writing, Dow futures are down 0.60%, S&P 500 futures are down 0.59%, and Nasdaq futures are down 0.83%.
In European markets, the pan-European Stoxx 600 index is trading roughly 0.5% lower. A heavy day of corporate earnings saw major chipmaker STMicroelectronics and food giant Nestlé punished by the market for disappointing results.
In contrast to the pressures faced by European markets, major Asian markets have shown relative strength. Investors are betting that the strong year-to-date rally in markets like South Korea's KOSPI will continue, benefiting from the ongoing AI investment boom.
South Korea's KOSPI index surged over 4% overnight, with SK Hynix gaining 4.8% and Samsung Electronics rising 3.7%. Tokyo's Nikkei 225 and Hong Kong's Hang Seng Index also moved higher.
US Stock Divergence
Earnings reports from Wall Street giants Alphabet and Tesla Motors on Wednesday showed no signs of slowing investment in AI infrastructure. Alphabet significantly raised its full-year capital expenditure plan.
Alphabet shares are down over 4.5% in pre-market trading after the company raised its full-year capital expenditure forecast to a range of $195 billion to $205 billion, up from a previous ceiling of $190 billion, and more than double its 2025 capital spending.
While the prospect of increased AI spending by large cloud computing companies has boosted Asian chipmakers, the performance of their US counterparts has been mixed. Texas Instruments, the world's largest maker of analog chips and embedded processors, failed to excite investors after its earnings report. The stock had already risen nearly 70% this year on optimism surrounding AI demand.
Charu Chanana, Chief Investment Strategist at Saxo, noted that large US tech companies may face increased scrutiny as they bear the investment costs, while chipmakers, memory suppliers, and infrastructure companies benefit earlier in the investment cycle.
Tesla Motors shares are down over 6% following its important earnings report on Wednesday. Despite a strong quarterly performance in its electric vehicle business, the company's profits fell sharply due to a significant increase in spending, and it experienced its first cash flow consumption in two years.
Doubts Over Returns on Massive Investments
Alphabet's earnings come amid a market-wide debate about whether large technology companies can justify the ever-increasing sums being poured into AI infrastructure.
Nevertheless, chipmakers and other companies involved in building AI infrastructure continue to benefit, as demand for related products and services remains high.
Mabrouk Chetouane, Head of Global Market Strategy at Natixis IM, suggested the persistent question of whether these massive investments will yield returns might be misguided. He argued that these tech companies simply have no choice but to make large-scale investments.
He pointed out that the momentum for capital expenditure growth is fully underway, which means strong demand for semiconductors will not disappear.
Market focus remains on oil prices and the renewed rise in global financing costs. This follows an escalation in the Middle East conflict between the US and Iran, which has sparked concerns about energy supply risks.
US Deploys B-1 Long-Range Strategic Bomber
Rising oil prices are also weighing on the market. As the Red Sea becomes a new risk point for shipping disruptions in the Middle East, Brent crude oil has broken through $98 per barrel, moving closer to the psychologically important $100 level.
Yemen's Houthi group, allied with Iran, stated on Thursday that it attacked two Saudi oil tankers as part of a maritime blockade against Saudi Arabia. This action could create a second key bottleneck in the global energy supply system, compounding the risk of the Strait of Hormuz being nearly closed due to Iranian actions.
Meanwhile, the US military has launched a new wave of strikes against Iran, following the directives of President Donald Trump. This marks the 12th consecutive night of US military operations, prompting further retaliation from Iran.
According to Axios, the US military deployed a B-1 long-range strategic bomber on Tuesday to strike targets associated with Iran's Islamic Revolutionary Guard Corps. The use of the B-1 bomber signals a significant escalation in the scale of US military operations. Market observers believe this could indicate that Washington is preparing for larger-scale actions, rather than continuing the more limited strike patterns seen recently.
Analysts at Deutsche Bank stated there are no signs of de-escalation in the US-Iran conflict, nor any indication that a peace agreement is being formed.
Shipping activity through the Strait of Hormuz has already declined significantly compared to June. Meanwhile, data from Kpler ship tracking shows that some vessels have changed course to avoid the Red Sea following the Houthi announcement of a maritime blockade against Saudi Arabia.
This has led to market concerns about longer shipping times and increased transportation costs, with potential tightening of global oil supply if the conflict escalates further.
European Borrowing Costs Surge
Traders have increased their expectations for further monetary policy tightening. The rise in oil prices has pushed the yield on Germany's 10-year government bond—a key benchmark for eurozone borrowing costs—above 3.2%, reaching its highest level since the European debt crisis era of 2011. This development has further intensified focus on the European Central Bank's policy meeting.
The market currently assigns only about a one-in-five probability of an interest rate hike at this meeting. However, traders see an 80% chance of a rate increase by the ECB in September.
Michiel Tukker, Senior Rate Strategist at ING, noted that while a rate hike could theoretically be considered today, the ECB has historically always provided sufficient policy signals well in advance.
Juliette Cohen, a strategist at CPR Asset Management in Paris, observed a clear acceleration in both oil prices and bond yields.
She pointed out that after yields breached key psychological levels, such as the UK's 5% and France's 4%, these changes are starting to impact the stock market.
In the US Treasury market, yields across maturities remained near multi-month highs during Asian trading hours. The two-year yield briefly rose to 4.309% before settling back to 4.307%, still close to Wednesday's high of 4.311%, a level not seen since February 2025. The 10-year yield touched Wednesday's two-month high of 4.665% before easing to 4.659%. The 30-year yield was also near Wednesday's two-month high of 5.154%, last trading at 5.150%.
ECB Decision Imminent
In the currency market, the US dollar edged slightly lower in the absence of new catalysts for further gains. The US Dollar Index fell 0.1% to 101.009, after reaching a one-week high of 101.210 on Tuesday.
The euro rose to near a one-week high against the dollar, trading at $1.1429, as traders await the ECB meeting for clues on a potential September rate hike.
Investors will also be watching the subsequent press conference by ECB President Christine Lagarde, with the market currently speculating on her future tenure.
Meanwhile, the Japanese yen weakened back towards 40-year lows against the dollar. A brief rebound following a Bloomberg report suggesting Bank of Japan officials might consider accelerating the pace of interest rate hikes has since faded.
Driven by rate hike expectations, Japan's policy-sensitive two-year government bond yield rose to its highest level in 31 years in Tokyo trading. Simultaneously, Japan's Finance Minister issued another intervention warning, stating the government would take "decisive action" if necessary.
Kit Juckes, a foreign exchange strategist at Societe Generale, argued that while the market commonly attributes the yen's recent weakness to the Bank of Japan being too cautious, the real issue is that rising oil prices are undermining expectations for Japan's GDP growth of 1.5% this year.
"Wall Street Short Seller" Paulson: Gold's Long-Term Bull Run is Just Beginning, Gold Mining Stocks Offer Real Profit.
John Paulson, the billionaire hedge fund manager who rose to fame by shorting the US subprime mortgage crisis and then accurately predicted the rise of gold, recently stated that gold is currently in the early stages of a long-term bull market.
Paulson indicated his belief that we are at the beginning or early phase of a long-term bull market for gold. He argued that as people lose confidence in fiat currencies, gold will continue to appreciate as an alternative asset. He further elaborated that gold is becoming the world's most important reserve currency, gradually replacing legal tender, with demand for physical gold from both central banks and the private sector continuously expanding.
In terms of investment strategy, Paulson believes that investors will achieve more substantial returns from gold mining stocks compared to holding physical gold, particularly those large companies with significant undeveloped reserves.
Semiconductor Rally Questioned: Is it Worth Buying into High Volatility?
After a month-long correction, semiconductor stocks have recently rebounded. However, investors are clearly divided on the sustainability of this rally. On one hand, the options market is signaling extreme short-term volatility. On the other, investment banks, citing historical drawdowns and seasonal factors, see opportunities to reposition.
Adam Turnquist, Chief Market Strategist at LPL Financial, stated that the semiconductor volatility index remains at "extremely high levels," especially when compared to the VIX, which measures volatility in the S&P 500.
Investors in the VanEck Semiconductor ETF (SMH) may still face significant short-term fluctuations. Meanwhile, the trading desk at Bank of America believes that US momentum stocks, after a period of profit-taking, are now attractively priced and has advised clients to refocus on the sector.
UBS's trading desk also stated earlier this week that the sell-off in momentum stocks may be nearing its end, and investors could begin rebuilding positions in AI and semiconductor stocks.
Key Stock Movements
Tesla Motors shares fell nearly 6% after its second-quarter earnings missed market expectations. The company's free cash flow turned negative due to margin pressure.
Alphabet shares dropped 4.5%. The company raised its full-year capital expenditure forecast to bolster its AI capabilities. Alphabet now expects its 2026 capital expenditure to be between $195 billion and $205 billion, up from a previous upper limit of $190 billion.
Defense giant Lockheed Martin saw its shares jump 6% after reporting better-than-expected second-quarter results. The company posted earnings per share of $7.94 on total revenue of $20.06 billion, surpassing analyst expectations of $7.19 EPS and $19.34 billion in revenue, according to FactSet. The company also raised its full-year earnings guidance.
Tech veteran IBM reported second-quarter earnings and revenue that fell short of analyst estimates. The stock experienced its largest-ever sell-off last week after IBM disclosed preliminary results, and the weakness has continued with this formal earnings report.
Texas Instruments beat market expectations for its second quarter, with EPS of $2.14 (above the LSEG forecast of $1.93) and revenue of $5.46 billion (exceeding the consensus estimate of $5.25 billion). Despite this, the stock fell 3.2%.
Eli Lilly announced positive phase 3 clinical trial results for two new drugs. The company plans to file for approval of its next-generation weight-loss drug in the first quarter of 2027. In one trial, obese patients with underlying cardiovascular disease lost an average of 55.8 pounds over 80 weeks, with a maximum average weight loss of 22.6% of body weight. Eli Lilly shares edged down slightly, over 1%.
Telecom giant Comcast reported better-than-expected second-quarter earnings, highlighting the strong performance of its NBCUniversal unit and announcing plans to spin off that division. The stock edged higher in pre-market trading.
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