AI Trade Cools as Middle East Tensions Escalate; US Stocks Open Lower

AI Trade Cools as Middle East Tensions Escalate; US Stocks Open Lower

TREE NEWS reports: US stocks opened lower on Thursday, with technology shares leading the decline as mixed corporate earnings and escalating geopolitical tensions in the Middle East dampened risk appetite. The Dow Jones Industrial Average fell 0.5%, the S&P 500 dropped 0.9%, and the Nasdaq Composite slid 1.5%. The Philadelphia Semiconductor Index tumbled about 4%, with optical communication and memory chip stocks broadly lower. CoreWeave fell around 5%, Tesla dropped about 3% after missing revenue expectations and cutting capital expenditure targets, and Meta lost roughly 5% as its future spending commitments soared to $825 billion.

The selloff was not confined to the US. Europe’s Stoxx 50 opened down 1.2%, Germany’s DAX fell 0.7%, the UK’s FTSE 100 slipped 0.3%, and France’s CAC 40 dropped 0.9%. Hermès shares plunged 6% after third-quarter sales missed estimates. In Asia, South Korea’s KOSPI briefly widened losses to 4%, with SK Hynix down over 6% and Samsung Electronics down more than 4%. Japan’s Nikkei 225 fell about 2.4%, and the MSCI Asia-Pacific index dropped 1.5%, hitting its lowest close since late July.

Market Implications

The core tension in the market is the sustainability of the AI-driven rally. Investors are increasingly scrutinizing whether the massive capital expenditures on data centers and computing infrastructure will translate into returns within a reasonable timeframe. The bar for earnings surprises has risen sharply, as Kaanhari Singh, head of Asia-Pacific equity derivatives sales at Barclays, noted: “The market is essentially telling us that the AI trade has moved from a concept and narrative phase to a phase of substantive performance verification, with much higher standards for beats—whether in capital expenditure guidance or clarity on monetization paths.”

Tim Waterer, chief market analyst at KCM Trade, added: “The market is extremely picky about capital expenditures right now. Companies increasing spending worry them, and cutting spending also worries them—Tesla is the latest case. In this environment, it’s almost impossible to find the right balance.”

Geopolitical risks added to the gloom. Following a deadly attack in Saudi Arabia, concerns over potential disruptions to oil supply intensified. The US State Department ordered the departure of non-emergency diplomatic personnel and their families from Saudi Arabia due to increasing threats from Yemen’s Houthi rebels. Moreover, US and Israeli militaries have reportedly drafted concrete plans for a new round of strikes on Iran after the US midterm elections. Brent crude rose 3.0% to $112.09 per barrel.

Safe-haven assets were in demand. US Treasury yields fell across the curve, with the 30-year yield down 3 basis points to 5.38%, the lowest since September 23. The Japanese yen was the strongest G10 currency against the dollar, rising 0.5% to 157.34 per dollar. David Forrester, senior strategist at Crédit Agricole in Singapore, said: “The decline in S&P 500 futures provided support for the yen. More importantly, the yen strengthened against all major currencies, including the dollar, reflecting its status as a safe-haven asset in the scenario of a stalled AI boom.”

Gold, typically a beneficiary of risk aversion, fell 2.0% to $4,058.05 per ounce, breaking below the $4,100 mark. Silver dropped 3.4% to below $56 per ounce. Bitcoin fell over 2% to around $82,800. The spread between French and German 10-year government bond yields widened to 169 basis points, the highest since 2011.

Key Takeaways for Investors

• AI trade under scrutiny: The market is demanding tangible results from AI investments. Companies with clear monetization paths and disciplined capital allocation are likely to outperform.
• Geopolitical risk premium: Escalating Middle East tensions could keep oil prices elevated, adding to inflationary pressures and complicating central bank policies.
• Safe-haven positioning: Treasuries and the yen are benefiting from risk aversion, while gold’s decline suggests shifting dynamics—possibly profit-taking or liquidity needs.
• Earnings volatility: With tech earnings on deck, expect continued volatility. The bar for positive surprises is high, and any disappointment could trigger outsized moves.

As Bloomberg strategist Mark Cranfield noted, before Microsoft and Alphabet report next week, the tech earnings blackout period makes it difficult for macro investors to form optimistic expectations. “This means firm oil prices will regain market focus, especially after the US State Department ordered the evacuation of diplomatic personnel from Saudi Arabia.”