Global stocks fell ahead of Alphabet's financial results announcement, as traders awaited the clearest indication yet of whether the cloud computing giant's massive investments in artificial intelligence were yielding worthwhile returns.
A two-day rally in the Nasdaq 100 index stalled after futures for the index fell 0.8%, while S&P 500 futures declined 0.4%.
In Asia, South Korea’s Kospi and other indexes packed with technology stocks pared back the large gains they made at the start of the session, with the MSCI Asia Pacific index reducing its gains to 0.1%.
The technology sector underperformed sharply compared to other sectors on the European Stoxx 600 index, which fell by 0.2%.
Rising oil prices renew inflation fears
The rise in oil prices also continued to dampen sentiment after the United States and Iran indicated they were in no hurry to resume talks following the escalation of their ongoing conflict in the Middle East.
Brent crude jumped above $95 a barrel, bringing its July rise to about 30% after the attacks resumed and after US President Donald Trump downplayed the likelihood of immediate talks with Iran.
The yield on 10-year US Treasury bonds settled at 4.64%, while the yield on the same term UK government bonds rose by one basis point to 5.04%.
While the US dollar remained largely unchanged, spot gold rose 1% to $4,118 an ounce, supported by buyers on lower prices despite escalating tensions in the Middle East. Bitcoin climbed 0.9% to $65,789.
Meanwhile, Bank of Japan officials are open to raising interest rates at a faster pace than economists predict, as the yen's decline increases the risk of higher inflation, according to people familiar with the matter. The Japanese currency has outperformed most of its major counterparts following this news.
The Japanese yen rose 0.1% against the US dollar to 162.95 yen per dollar, after earlier falling below 163 against the dollar for the first time since 1986.
Investors are awaiting the returns on massive spending on artificial intelligence.
After Alphabet announced last quarter its intention to more than double its 2025 capital expenditure to $190 billion this year, investors will be closely watching for any signs that these investments are generating returns. However, companies developing AI infrastructure globally need to continue increasing their spending to justify the exceptional gains in their share prices.
The financial results announcement will come at a time when shares of market-leading chipmakers are still experiencing extreme volatility amid concerns that the current pace of spending on artificial intelligence cannot be sustained.
Hiroshi Namayoka, chief strategist at T&D Asset Management, told Bloomberg: “Expectations for the results of major cloud computing companies are high, and investors should be aware of the risk that stocks could fall, even if earnings exceed market expectations.”
The surge in technology stocks came after weeks of volatility in the best-performing segment of the market this year, as investors questioned whether massive spending on artificial intelligence would translate into commensurate returns. Attention now turns to the earnings reports from Alphabet and Tesla, which begin on Wednesday, with high expectations leaving little room for disappointment.
Brett Kenwell, an analyst at eToro, said: “The burden of proof has changed. Investors are no longer asking whether companies can withstand uncertainty. They want growth and prospects strong enough to justify high valuations.”
Concerns about high valuations triggered a sell-off in chipmakers' stocks earlier this month, briefly pushing the Philadelphia Semiconductor Index into a bear market last week. The index rebounded more than 5% on Tuesday, while Asian chipmakers' stocks jumped more than 2.5%.
Oil and interest rates bring inflationary pressures back to the forefront
The surge in oil prices has reignited fears that inflationary pressures will push the Federal Reserve to raise interest rates.
Tim Waterer, chief market analyst at KCM Trade in Sydney, wrote: “The market is learning to live with higher oil prices. But the big question is: for how long? For now, strong earnings are coming to the rescue, helping to shift the market’s focus away from the fact that oil prices are rising.”
Attention is also turning to pharmaceutical companies after Trump announced plans to impose 100% tariffs on generic drugs imported into the United States, starting in August 2028.
Focus on company results
Investors also continue to focus on corporate earnings. Growth in US corporate profits should continue to support stocks in the second half of the year, even as short-term uptrends and adverse macroeconomic factors weigh on share prices, according to strategists at Goldman Sachs Group.
Companies representing roughly 20% of the S&P 500, measured by market capitalization, are scheduled to report their earnings this week. Alphabet and Intel will give investors a clearer picture of how spending on artificial intelligence is reshaping the technology sector. Intel reports its earnings on Thursday.
While the recent sell-off in AI-related stocks has raised questions about the sustainability of this investment wave, some strategists see it as a reset rather than an indication of deteriorating fundamentals.
Adam Turnquist of LPL Financial said: “The long-term outlook for AI appears to remain intact. The recent correction seems more consistent with a healthy reset following a near-vertical rise, rather than a fundamental breakdown in AI investment sentiment.”
