U.S. stock markets were on course for a weaker open Thursday morning, as the first round of second-quarter earnings from major technology companies brought renewed anxiety about enormous AI-related spending — and a fresh spike in oil prices linked to growing Middle East instability made matters worse.
Two of the so-called “Magnificent Seven” megacap companies — Alphabet and Tesla — were among the first to release their quarterly results this season, and neither managed to satisfy investors.
Alphabet, the parent company of Google, reported its strongest cloud computing growth on record. However, rather than reassuring markets, the results turned attention to the company’s plans to significantly increase spending going forward. Alphabet shares tumbled 5.4% in premarket trading.
Tesla fared even worse, dropping 7.7% after disclosing negative free cash flow for the second quarter — the first time that has happened in more than two years.
AJ Bell investment director Russ Mould put the investor unease into perspective. “Alphabet is spending hundreds of billions of dollars as it looks to stay ahead in the AI arms race,” he said. “But there is still a healthy degree of scepticism about the ability of these investments to generate a commensurate level of return.”
The question of capital spending will stay front and center as other major technology firms release their earnings next week. Investors are increasingly asking whether the staggering amounts being funneled into AI are producing meaningful financial returns, and whether profit growth can justify the lofty valuations these stocks currently carry.
Geopolitical tensions added another layer of pressure to markets. After months of investor focus on the Strait of Hormuz, the spotlight has now shifted to the Red Sea, where Iranian-aligned Houthi militants — who control territory near the Bab el-Mandeb strait — have opened a new front in the ongoing Middle East crisis. U.S. President Donald Trump stated he would hold Iran responsible for any attacks carried out by Yemen’s Houthi fighters.
Brent crude futures climbed to just under $100 per barrel, reaching their highest point since early June. That surge in oil prices brought inflation fears roaring back, pushing interest-rate-sensitive 2-year Treasury yields to a 17-month high. Traders ramped up bets that the Federal Reserve could raise interest rates as soon as next week.
According to CME’s FedWatch tool, markets are now pricing in roughly a 35% probability of a 25-basis-point rate hike at the Fed’s July meeting — up sharply from just 12% a week ago. The odds of a similar move in September are now sitting at 55%.
A separate report showed that the number of Americans filing first-time unemployment claims dropped significantly last week, giving Fed officials little reason to ease up on their inflation-fighting stance.
As of 8:48 a.m. Eastern Time, Dow E-minis were down 527 points, or about 1%. S&P 500 E-minis fell 74 points, or roughly 0.98%, while Nasdaq 100 E-minis dropped 408.5 points, or 1.4%.
Semiconductor stocks, which have been on a bumpy ride recently, showed mixed results. Texas Instruments fell 4.8% even after projecting quarterly revenue above analyst expectations.
On the brighter side, defense company Lockheed Martin gained 4.8% after raising its 2026 sales and profit forecasts. Enterprise software firm ServiceNow climbed 5.3% after boosting its annual subscription revenue outlook for the second time.
