Magnificent Seven loses $797 billion as AI costs, oil surge

The Magnificent Seven tumbled 4.8 percent, erasing $797 billion in market value, as AI spending concerns and surging oil prices rattled investors.

"Higher oil prices are likely to add to inflation pressures, when inflation was already running well above the Fed's target of 2 percent," Melissa Brown, Global Head of Investment Decision Research at Simcorp, said in written commentary. "This, in turn, has led bond investors to assign a higher likelihood of a rate increase."

Tesla led the decline, plunging nearly 15 percent after reporting second-quarter profit of 33 cents a share, well short of the 55-cent consensus, as capital expenditures more than doubled to nearly $6 billion and the company burned through more than $1 billion in free cash flow — its first negative free cash flow since early 2024. Alphabet fell 7 percent after raising its full-year capex forecast to as much as $205 billion, marking the second time this year the company has boosted its spending outlook. The news overshadowed a 24 percent revenue increase to $119.8 billion that topped estimates. Amazon and Meta each dropped about 4.5 percent and 3.5 percent, respectively, while Nvidia and Microsoft also traded lower. The S&P 500 Consumer Discretionary and Communication Services sectors sank 5 percent and 4.8 percent, leading all 11 GICS groups lower.

The selloff pushed the S&P 500 down 1.2 percent and the Nasdaq 100 down 1.9 percent, while the Dow Jones Industrial Average shed about 500 points, or 1 percent. The 10-year Treasury yield climbed to 4.71 percent, its highest since January 2025, up more than four basis points from Wednesday's close. Traders are now pricing in a 36 percent probability of a Federal Reserve rate hike at next week's meeting, up from about 12 percent a week ago, and an 82 percent chance of at least a quarter-point hike at the September meeting, according to the CME Group's FedWatch tool.

Oil Breaches $100 as Iran Tensions Escalate

Brent crude futures rose 6.2 percent to just under $100 a barrel after earlier touching $102, while West Texas Intermediate surged 5.4 percent to $91.50. The jump followed news that Iran-backed Houthi rebels struck a pair of Saudi Arabian tankers, prompting President Donald Trump to warn that the US would hold Iran responsible and inflict "major military punishment" if attacks continued. The US dollar index rose 0.3 percent to 101.44, while gold futures declined 2.5 percent to $4,050 an ounce. Bitcoin traded around $64,700, down from overnight highs near $66,300.

Rate-Hike Bets Surge as Inflation Fears Return

With gasoline prices moving back above $4 a gallon, stoking inflation fears, traders boosted expectations for tighter monetary policy. The probability of at least a quarter-percentage-point rate hike at the Fed's September meeting rose to 82 percent, up from 52 percent a week ago. "Overall, we seem to be at a point where inflation is no longer an indicator of a strong economy, but has reached a level where it might cause the opposite," Brown said.

The simultaneous shock from Big Tech's AI spending cycle and a geopolitical oil spike creates a difficult environment for equity investors, who now face both valuation compression from higher rates and margin pressure from rising input costs. The Magnificent Seven alone are expected to spend more than $700 billion on capex this year, with the majority earmarked for AI infrastructure — a bet that has yet to deliver clear returns for shareholders. Alphabet CFO Anat Ashkenazi told investors that capital expenditures could "increase significantly" in 2027 as well, suggesting the spending cycle has further to run.

This article is for informational purposes only and does not constitute investment advice.