This year's stock rally has withstood war, inflation and uncertainty surrounding the tech sector's massive artificial-intelligence investments. The question now is: Have investors finally reached their limit?
Major stock indexes have posted healthy gains this year. But the S&P 500 and Nasdaq composite both fell last week for the second time in a row -- their first consecutive weeks of declines since March, in the initial aftermath of the U.S.-Israeli attacks on Iran.
The catalysts behind the declines weren't surprising new developments, but rather the same threats that have dogged investors for months, only dialed up a little further. Those include the widening conflict in the Middle East driving up oil prices, bond yields surging to their highest levels in more than a year and a tech giant announcing yet another increase in capital expenditures.
The pressures could mount in the week ahead, with both Microsoft and Meta Platforms set to report earnings on the same day that the Federal Reserve makes a decision on interest rates widely seen as one of the least predictable in years.
With the economy still growing and companies reporting solid earnings, the S&P 500 is still within 3% of all-time highs. But analysts say that the outcome of this week's events could easily tip the market one way or the other.
"Right now the worry list and the list of what's going right kind of balance each other," said Ed Yardeni, president of Yardeni Research. "There's an overall unsettled sense that there are too many uncertainties and too many problems, so let's all hunker down."
Investors' focus on tech earnings stems from their conflicted feelings about AI investments.
The historic spending on chips and data centers by the likes of Alphabet, Microsoft and Meta has helped power stocks to double-digit gains in recent years by lifting economic growth, creating windfall profits for suppliers and stirring dreams of a more productive economy. But it has also spurred periodic selloffs, as investors have blanched at the mind-boggling cost of the enterprise.
Those concerns have rarely been more acute than they are now. Investors entered the year expecting tech companies to spend hundreds of billions of dollars on AI infrastructure. But they have still been surprised by the scale of those investments and the measures needed to fund them.
Big AI spenders, often called hyperscalers, have already borrowed more than $200 billion this year in bonds and loans, and announced another $115 billion in equity raises, according to the research firm CreditSights. Surprise $25 billion bond sales from Nvidia and Amazon.com have sparked sharp declines in hyperscaler debt prices in recent weeks, with investors worried about how much more issuance could come in the future.
Similarly, Alphabet's class A shares have slumped 15% since it announced on June 1 that it would issue at least $80 billion of equity. They dropped 7.8% this past week after the company raised its forecast for 2026 capital expenditures by $15 billion to a new range of $195 billion to $205 billion.
Alphabet's losses spread to other tech stocks, sending the Magnificent Seven to their biggest collective one-day drop in market value since the tariff turmoil last April.
"The spending numbers just keep going up, and the market is getting nervous," said Eric Diton, president and managing director at The Wealth Alliance. "When you make investments like this, there's not an immediate return."
Adding to those anxieties is an intensifying conflict in the Middle East that is lifting oil prices and threatening to hamper the global economy. On Wednesday, Houthi militants fired on Saudi tankers in the Red Sea. President Trump threatened to unleash a "major military punishment" against Iran if the attacks continued.
For months, investors have been often willing to look past the conflict, wagering that the two countries could negotiate a resolution well before the war posed a long-term threat to markets.
Their patience has limits, however. Not only did oil prices jump last week, but yields on U.S. government bonds also climbed to their highest level since January 2025, reflecting growing concerns that the Fed will need to raise rates soon to keep a lid on inflation.
Treasury yields are heavily influenced by investors' expectations for short-term rates set by the Fed. They in turn set a floor on other borrowing costs such as mortgage rates, so their rise can slow economic growth and drag on stock returns.
Interest-rate futures showed Friday afternoon that traders see a roughly 36% chance that the Fed will raise rates this week, according to CME Group, pointing to unusual uncertainty about the central bank meeting.
Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, said that there could be "a little bit of a sigh of relief" if the Fed doesn't raise rates or strongly signal that rate increases are coming but that the feeling likely wouldn't last long, as investors anxiously await coming inflation data.
With the yield on the 10-year Treasury note hovering around 4.7%, "we're really on the cusp of breaking through some key levels," he added. "If we sustain a break of 4.7%, I think 4.8% is the next move, and if we break that, it's 5%."
Write to Sam Goldfarb at sam.goldfarb@wsj.com and Hannah Erin Lang at hannaherin.lang@wsj.com
(END) Dow Jones Newswires
July 26, 2026 21:00 ET (01:00 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
Comments