On Tuesday, Wall Street showed a general upward trend, despite significant declines in the shares of computer chip manufacturers worldwide. Meanwhile, oil prices were seen decreasing further from the two-month peak they hit the previous week.
During afternoon trading, the S&P 500 posted a 0.3% gain, though this slight increase disguised greater volatility beneath the surface. By 12:30 PM Eastern Time, the Dow Jones Industrial Average had risen by 643 points, or 1.2%. In contrast, the Nasdaq composite index, heavily weighted with AI stocks, fell 0.2%, after briefly plummeting 9.3% from the record it set last month.
The broader U.S. market ticked upward after numerous companies reported stronger-than-expected profits for the spring quarter. Coca-Cola's stock jumped 5.1% as its revenue increased by 7%, despite CEO Henrique Braun describing a "dynamic consumer landscape."
Both Sherwin-Williams and Illinois Tool Works saw their stocks rise by 8.4% and 5.2%, respectively, following their better-than-anticipated earnings reports. Generally, stock prices align closely with corporate profit trends over the long term, and there are heightened expectations for this latest earnings season since the U.S. stock market remains close to its historical highs.
However, these expectations are placing significant pressure on stocks related to semiconductors and companies that have greatly benefited from the recent artificial intelligence boom. For instance, Micron Technology’s stock has experienced tremendous growth, more than tripling this year, with its revenue during the quarter ending May 28 increasing over fourfold compared to the previous year.
Concerns are emerging about the sustainability of such rapid growth. Major investors in computer memory may begin to pull back if AI does not yield the anticipated profitability or efficiency. The introduction of lower-cost AI options from China could also decrease demand for memory and computing resources.
Micron's stock fell 8.9%, becoming the largest drag on the S&P 500. Other notable decliners included Advanced Micro Devices, which dropped 7%, and Applied Materials, down 8.2%. The declines in AI-related chip stocks were even more pronounced in global markets earlier in the day.
South Korea’s Kospi index saw a drop of 10.8%, driven down by substantial decreases in SK Hynix and Samsung Electronics; trading was temporarily suspended in Seoul due to the severe market downturn. Analyst Jing Jie Yu from Morningstar noted that the market seemed rattled by advancements in China's chip manufacturing capabilities, raising fears about the competitive position of global chipmakers. However, he believes the sell-off was an exaggerated reaction and that established leaders in the field are unlikely to face significant threats.
This week, several major investors in AI chips and data centers are slated to release their quarterly earnings reports, which are anticipated to provide insights into their future investment strategies. Meta Platforms and Microsoft are set to report on Wednesday, followed by Amazon on Thursday.
Due to the enormity of AI stocks' growth, their fluctuations significantly impact the S&P 500 and other indices. However, Wall Street might remain resilient if other, less prominent sectors continue to perform well—an adjustment that some strategists suggest could be beneficial for the overall market.
In the oil sector, Brent crude for October delivery dropped 5.2% to $81.38. The price had been on a decline since hitting a brief high of $102 per barrel last week. Factors contributing to fluctuating prices include concerns that escalating conflicts in the Middle East could disrupt global oil supply, tempered by hopes for potential negotiations between the U.S. and Iran that might facilitate oil tanker operations through the Strait of Hormuz.
Falling oil prices also resulted in easing Treasury yields in the bond market, with the yield on the 10-year Treasury decreasing to 4.59% from 4.65%. A disappointing consumer confidence report from the Conference Board revealed fewer individuals feeling optimistic about current business conditions, further impacting yields.
The decline in oil prices led traders to reduce predictions of a potential interest rate hike by the Federal Reserve in its upcoming meeting, decreasing the projected likelihood to 28.3% from over 36% the previous day, based on CME Group data. While increased rates might help curb inflation, they could simultaneously hinder economic growth by raising borrowing costs for households and businesses. Long-term mortgage rates have already reached their highest level in nearly a year, further cooling the housing sector.
