Traders work on the floor of the New York Stock Exchange on Thursday as US stocks fell sharply amid a surge in oil prices driven by the ongoing US-Iran conflict. [Yonhap-Getty Images/AFP]
Traders work on the floor of the New York Stock Exchange on Thursday as US stocks fell sharply amid a surge in oil prices driven by the ongoing US-Iran conflict. [Yonhap-Getty Images/AFP]

All three major US stock indexes fell Thursday as surging oil prices fanned fears of a resurgence in inflation, raised the prospect of Federal Reserve interest rate hikes and compounded concerns over heavy AI spending by big tech companies.

The Dow Jones Industrial Average closed down 506.93 points, or 0.97 percent, at 51,711.65 on the New York Stock Exchange on Thursday.

The S&P 500 fell 90.66 points, or 1.21 percent, to 7,408.30, while the tech-heavy Nasdaq Composite tumbled 553.21 points, or 2.15 percent, to 25,137.69.

The dominant market driver was a sharp spike in crude oil prices. September-delivery Brent crude futures settled up 7.04 percent at $100.69 a barrel, crossing the $100 mark for the first time in two months. September-delivery West Texas Intermediate futures also rose 6.17 percent to close at $92.19 a barrel.

Brent crude reached its highest level since May 22 last year, while WTI hit its highest since June 4 last year.

Supply anxiety intensified as a Saudi Arabian oil tanker sailing through the Red Sea came under attack, adding to persistent concerns about disruptions to shipping through the Strait of Hormuz, a critical artery for global crude exports.

Yemen's Iran-backed Houthi rebels, who had already declared a blockade of Saudi Arabia in the Red Sea, claimed responsibility for Thursday's attack on two Saudi oil tankers. The Bab el-Mandeb Strait in the Red Sea ranks alongside the Strait of Hormuz as one of the Gulf region's most vital oil shipping lanes.

The United States carried out airstrikes against Iran for a 12th consecutive day, and President Donald Trump signaled the possibility of a large-scale attack against the country.

Rising oil prices stoked inflation fears and pushed US Treasury yields higher. The benchmark 10-year Treasury yield climbed 4 basis points to 4.70 percent — its first breach of the 4.7 percent level in a year and a half, since January last year.

A separate report showing that weekly initial jobless claims fell to their lowest level since 1969 added further upward pressure on yields. The robust labor market data reinforced expectations that the Fed would prioritize price stability over economic slowdown and could raise its benchmark interest rate.

According to CME FedWatch, the probability of a 25-basis-point rate hike by year-end fell from 34.0 percent to 32.4 percent on Thursday. The probability of a 50-basis-point hike stood at 38.2 percent, while the odds of a 75-basis-point increase rose from 16.4 percent to 18.1 percent.

"The 2-year Treasury yield will matter more to markets," said Ross Mayfield, an investment strategist at Baird. "The Iran conflict is hard to ignore because it puts pressure not just on oil prices but across the entire Treasury yield curve."

Earnings reports from major technology companies also weighed on share prices.

Alphabet, Google's parent company, posted second-quarter sales and cloud business growth that beat market expectations, but its adjusted earnings per share fell short of estimates. The company also raised its capital expenditure forecast for this year to between $195 billion and $205 billion, up from a prior range of $180 billion to $190 billion, deepening concerns about the cost of AI investment. Alphabet shares tumbled 6.8 percent.

Tesla reported sales that topped market expectations, but its shares fell 14.52 percent after the company's cash flow turned negative for the first time in two years and AI-related capital spending drew fresh scrutiny.

Wariness over heavy AI capital expenditure spread across the broader technology sector. Amazon and Meta, which are similarly focused on AI investment, each fell around 4 percent, while Apple and Nvidia slipped roughly 1 percent.

Some semiconductor stocks seen as direct beneficiaries of AI infrastructure spending held up relatively well. The Philadelphia Semiconductor Index edged down just 0.54 percent, while Micron and SK Hynix's American depositary receipts each rose around 3 percent.

"The surge in oil prices amid geopolitical uncertainty, combined with concerns over capital expenditure expansion by the Magnificent Seven, is putting significant pressure on the market," said Daniel Skelly, a strategist at Morgan Stanley. "If AI companies fail to demonstrate sustained upside momentum, share price volatility could persist for now."

The CBOE Volatility Index rose 2.06 points, or 12.38 percent, to 18.70.


kacew@heraldcorp.com