July 23 - U.S. stock index futures traded lower on Thursday as the market absorbed a combination of renewed anxiety about large-scale AI spending and a sharp rise in oil prices linked to an expanding Middle East conflict.
Investors reacted cautiously to the initial wave of megacap quarterly reports, with Alphabet and Tesla setting the tone for the so-called "Magnificent Seven" companies. Alphabet reported its strongest-ever quarter of growth in its cloud business, but attention shifted to its plans for increased spending. The Google parent’s shares fell 3.9% in premarket trading.
Tesla’s update produced a negative market response as well. The automaker reported negative free cash flow for the second quarter - the first time it has done so in more than two years - and its shares dropped 5.8%.
"Alphabet and Tesla are showing two very different stages of the AI investment cycle," said Lale Akoner, global market strategist at eToro. "Alphabet is beginning to show that connection. Tesla still needs to prove that its ambitious projects can move from technological promise to commercial returns."
Market participants said capital spending plans will be closely scrutinized as additional major technology companies report next week. Investors are asking whether the substantial sums being directed toward artificial intelligence will produce meaningful returns and whether profit growth can support currently elevated equity valuations.
Geopolitical developments compounded investor concerns. After months of focus on the Strait of Hormuz, attention shifted to the Red Sea, where Iranian-aligned Houthi forces - who control areas near the Bab el-Mandeb strait - have opened a new front in the regional crisis. The escalation coincided with another leg up in oil prices.
Brent crude futures climbed to $98 a barrel, marking their highest level since early June. The surge in energy prices revived inflation worries and helped lift 2-year Treasury yields to a 17-month high as traders increased bets on a Federal Reserve rate hike as soon as next week.
Markets are now pricing in about a 35% chance of a 25-basis-point increase at the Fed’s July meeting, up from 12% a week earlier, according to the CME FedWatch tool. Expectations for a similar move in September are priced at around 55%.
At 5:37 a.m. ET, futures trading showed Dow E-minis were down 225 points, or 0.43%, S&P 500 E-minis were down 29.25 points, or 0.39%, and Nasdaq 100 E-minis were down 109 points, or 0.37%.
Within technology-related and chip segments, performance was mixed. Texas Instruments fell 5.2% despite forecasting quarterly revenue above estimates, illustrating investor sensitivity to outlooks and broader demand signals.
Moves outside the tech sector were notable as well. Health insurer Molina Healthcare tumbled 8.8% even after raising its annual profit forecast and reporting stronger-than-expected second-quarter results, suggesting that company-specific developments can be overshadowed by wider market sentiment. By contrast, ServiceNow jumped 8.1% after the enterprise software company raised its annual subscription revenue forecast for the second time, a positive signal for its revenue trajectory.
Market snapshot
- Alphabet shares fell 3.9% in premarket trading following cloud growth and higher spending plans.
- Tesla dropped 5.8% after reporting negative free cash flow for Q2, the first such occurrence in over two years.
- Brent crude rose to $98 a barrel, highest since early June, reviving inflation concerns.
- Two-year Treasury yields reached a 17-month high amid increased odds of a Fed rate hike.
- Futures: Dow E-minis down 225 points (-0.43%), S&P 500 E-minis down 29.25 points (-0.39%), Nasdaq 100 E-minis down 109 points (-0.37%).
Investors and analysts will be watching upcoming quarterly reports for further clarity on capital spending, AI-related investment pacing, and whether incremental revenue or profit gains will offset the elevated spending levels that are weighing on market sentiment.