Sharp drops for AI stocks overwhelm markets worldwide as oil prices jump

On Thursday, the global stock markets experienced a significant decline, largely driven by a sharp downturn in artificial intelligence (AI) stocks. Concurrently, oil prices surged to their highest levels since May, fueled by concerns surrounding the ongoing conflict with Iran.

The S&P 500 index dropped by 1.2%, marking its most substantial decline since July, while the Nasdaq composite saw a more pronounced fall of 2.6%. The tech sector's struggles were so pronounced that they overshadowed gains in other areas of the U.S. market, where most stocks actually recorded increases. The Dow Jones Industrial Average managed a modest gain of 11 points, representing an increase of less than 0.1%.

Stocks within the AI sector have been volatile recently, as investors fret over rising borrowing costs associated with the development of data centers and the procurement of AI chips. There are also concerns that valuations in this sector may have escalated too quickly following a prolonged surge in interest, even as companies continue to report positive growth figures.

For instance, Lam Research, a company that provides equipment and services for semiconductor manufacturing, reported summer profits and revenues that surpassed analyst expectations. However, despite these positive results, Lam Research's stock plummeted by 11.8%.

Other prominent tech companies also faced declines following their quarterly earnings reports, which included some positive indicators. Meta Platforms, which is advancing its Muse AI agent, saw its stock drop by 7% despite reporting better-than-expected revenue for the quarter. The parent company of Facebook and Instagram also announced plans to create a new class of stock aimed at raising funds for AI investments and other expenditures, which contributed to a loss of tens of billions in market value as profit figures did not meet expectations.

Tesla's stock fell by 3.1% after the company reported stronger-than-anticipated profits for the summer, though revenue figures were below forecasts. The decline in AI stocks also affected Nvidia, which saw a 4.4% drop. Given that Nvidia is the largest company by market capitalization on Wall Street, its stock movements significantly impact the S&P 500, making it a key factor in the index's decline.

CoreWeave, a company that has taken on debt to purchase Nvidia’s AI chips for cloud rental services, has faced increasing scrutiny regarding its financial stability and saw its stock plunge by 10.1%.

The downturn in AI and tech stocks began in Asia, where major indexes are populated with technology firms. South Korea's Kospi index fell by 3.5%, Hong Kong's Hang Seng dropped by 3%, and Japan's Nikkei 225 experienced a decline of 2.7%.

Additionally, the spike in oil prices weighed heavily on global stock markets. Brent crude oil prices rose by 4%, reaching $113.17 per barrel, marking their highest level in five months. This surge is attributed to uncertainty surrounding the timeline for the normalization of the global energy sector amid the ongoing conflict with Iran, with prices having increased from under $97 at the beginning of the month.

In Europe, France’s CAC 40 index also experienced a notable decline, falling by 1.4%. While it has fewer tech stocks compared to Asian or U.S. markets, it was negatively affected by rising yields on French government bonds. These yields have been climbing due to concerns over the country's significant debt and budget challenges, exacerbated by ongoing violent protests pushing the government for increased spending.

Concerns regarding government debt are pervasive across many developed economies, including the United States. These worries, along with high inflation and signs of a resilient U.S. economy, have driven bond yields in the U.S. to their highest levels in decades. However, on Thursday, U.S. yields saw a notable drop as investors sought safer assets amidst the declining AI stocks.

The yield on the 10-year Treasury fell to 4.97%, down from 5.13% at the close on Wednesday and from over 5.30% earlier in the month, indicating a significant shift in the bond market. This decline in yields occurred even as a report suggested that the U.S. economy may be performing better than anticipated, with fewer workers filing for unemployment benefits last week, indicating low levels of layoffs nationwide.

The overall strength of the U.S. economy has enabled many companies to post larger profits, contributing to a record high in the U.S. stock market earlier this month, despite ongoing concerns. On Thursday, two-thirds of the stocks in the S&P 500 rose, although the losses among major tech stocks overshadowed these gains.

Companies such as Procter & Gamble, Lockheed Martin, and CSX reported earnings that exceeded expectations for the summer, helping to mitigate the overall market losses. Procter & Gamble's CEO, Shailesh Jejurikar, acknowledged ongoing “geopolitical and economic challenges” but maintained the company’s forecasts for growth in revenue and profit for the year. The stock for Procter & Gamble, known for brands like Crest and Olay, increased by 5.6%.

In summary, the S&P 500 closed down 93.74 points at 7,663.43, while the Dow Jones Industrial Average increased by 11.89 points to 52,867.98, and the Nasdaq composite fell by 694 points to 26,008.86.