Wall Street drops on oil jitters, AI trade splinters
US equities fell as surging crude prices fanned inflation concerns, overshadowing a divergence within the technology sector ahead of key megacap earnings.
The S&P 500 and Nasdaq closed lower, snapping months of steady momentum that had lifted major indexes from their March lows. The downturn was driven by a sharp rise in crude oil futures and uneven performance among heavyweight technology stocks.
Crude oil settled at its highest level since June 11, jumping roughly 3% after Yemen's Iran-backed Houthi militia threatened shipping in the Red Sea. US President Donald Trump vowed to destroy an Iranian bridge or power plant if Iran attacks a ship in the Strait of Hormuz, another critical energy route.
The geopolitical tension is translating into market anxiety over inflation. "Excluding the megacap AI trade, there's an element of what's going on with oil that's driving the market," said Kevin Gordon, head of macro research and strategy at Charles Schwab. "People are being defensive with utilities, but with energy and materials being higher, that's the inflation component."
Those inflation fears are anchoring interest rate expectations. A Reuters poll of economists forecasts the Federal Reserve will keep rates steady through the rest of 2026, though the risk of a hike is viewed as elevated. Traders currently assign a roughly 66% probability that the central bank holds rates at its meeting next week, according to CME Group's FedWatch tool.
Within equities, investors are separating AI winners from losers. The Philadelphia SE Semiconductor Index shook off early losses to end higher, targeting a third consecutive day of gains following last week's bear market confirmation. Software stocks, however, declined.
"Investors have become a lot more discerning and specific as to where they're choosing to invest in the AI trade," Gordon noted. The shift highlights growing skepticism toward broad-based tech exposure.
This selective approach sets the stage for after-the-bell results from Alphabet and Tesla, the first of the "Magnificent Seven" megacaps to report this season. Alphabet saw choppy trading ahead of its release, hindered by a recent delay in the launch of a core AI model. Texas Instruments, also reporting late, ticked higher.
Outside of tech and energy, AT&T gained after posting second-quarter wireless subscriber additions that exceeded expectations. Philip Morris International rose as stronger cigarette demand drove quarterly results above analyst estimates.
