Dow falls 500 points as oil surge, AI spending fears hit Wall Street

US stocks ended sharply lower on Thursday as a surge in oil prices, escalating geopolitical tensions in the Middle East, and disappointing reactions to earnings from Alphabet and Tesla weighed heavily on investor sentiment.

The Dow Jones Industrial Average fell 507 points, or 1%, while the S&P 500 declined 1.2%.

The Nasdaq Composite led the losses, dropping 2.2%, as technology stocks came under pressure following earnings from two of the market's largest companies.

Alphabet shares slid about 7% after the Google parent raised its capital expenditure outlook for 2026, reinforcing investor concerns over the scale of spending required to support artificial intelligence infrastructure.

Tesla tumbled 14% after reporting a significant second-quarter earnings miss, with operating expenses rising faster than revenue and the company posting negative free cash flow alongside Alphabet.

Oil rally adds to market pressure

Markets were also weighed down by a sharp rise in crude oil prices as geopolitical tensions intensified.

Brent crude futures climbed 7% to settle at $100.69 per barrel, the first close above $100 since May, while US West Texas Intermediate crude advanced 6% to settle at $92.19 per barrel.

Both benchmarks reached their highest levels since before the United States and Iran reached a ceasefire agreement last month.

Oil prices surged after Yemen's Iran-backed Houthi group claimed attacks on two Saudi Arabian oil tankers in the Red Sea, raising concerns that the conflict could spread further across the region.

Investor anxiety also increased after President Donald Trump threatened further military action against Iran and later indicated he was considering a larger military operation.

The spike in crude prices reignited concerns that higher energy costs could keep inflation elevated, complicating the Federal Reserve's policy outlook.

AI spending concerns weigh on technology stocks

Technology shares remained under pressure as investors questioned whether aggressive artificial intelligence spending by hyperscalers will deliver sufficient returns.

Alphabet increased its projected 2026 capital expenditures to between $195 billion and $205 billion, up from its previous forecast of $180 billion to $190 billion.

While the higher spending reflects continued demand for AI infrastructure, it also reinforced concerns about mounting investment costs and profitability.

The weakness extended across the technology sector, with other hyperscalers including Meta Platforms, Microsoft and Amazon also finishing lower.

Tesla added to the pressure after its quarterly results disappointed investors.

The electric vehicle maker reported a substantial earnings miss, while operating expenses grew faster than revenue.

Both Tesla and Alphabet generated negative free cash flow during the second quarter, adding to investor caution over capital-intensive growth strategies.

The Philadelphia Semiconductor Index also traded lower during the session as investors awaited earnings from Intel, while Texas Instruments shares declined despite issuing quarterly revenue guidance above analyst estimates.

Treasury yields climb as Fed outlook shifts

The rally in oil prices pushed Treasury yields higher as investors reassessed the outlook for inflation and monetary policy.

The benchmark 10-year Treasury yield climbed above 4.7%, its highest level since January 2025, while the two-year Treasury yield rose above 4.36%.

Rising yields reflected growing expectations that persistent inflation could delay interest-rate cuts or even result in further tightening.

Fed funds futures indicated traders were assigning an 82% probability of a September rate hike, up significantly from a week earlier, although markets continued to expect the Federal Reserve to leave rates unchanged at next week's policy meeting.

Market volatility also increased, with the CBOE Volatility Index reaching its highest level in nearly a month.

While losses were broad-based, industrial stocks outperformed after Lockheed Martin raised its 2026 sales and profit forecasts, and Thermo Fisher Scientific gained after lifting its full-year earnings outlook.