[BRIEFING.COM] The stock market ended sharply lower on Thursday as investors reassessed the cost of the AI arms race following earnings from Alphabet (GOOG 318.34, -23.57, -6.89%) and Tesla (TSLA 319.60, -54.41, -14.55%), while another surge in oil prices added to inflation concerns and pushed Treasury yields higher. The S&P 500 (-1.2%), Nasdaq Composite (-2.2%), and DJIA (-1.0%) all finished near their session lows, with growth stocks bearing the brunt of the selling pressure.

The market's largest technology companies led the retreat after Alphabet substantially increased its FY26 capital expenditure guidance, raising fresh questions about margins, free cash flow, and how quickly massive AI investments will generate meaningful returns. The announcement also reinforced the notion that other hyperscalers may have little choice but to continue raising AI spending to remain competitive, even as investors become increasingly focused on capital discipline. Tesla added to the cautious tone after pairing a disappointing earnings report with an even more aggressive investment outlook, reinforcing concerns that spending on AI and autonomous vehicle initiatives may continue to outpace near-term profitability.

The shift in sentiment weighed heavily on the market's largest growth stocks, with all seven "Magnificent Seven" components finishing lower and the Vanguard Mega Cap Growth ETF declining 2.4%. The communication services (-5.2%) and consumer discretionary (-5.1%) sectors finished as the weakest-performing sectors, reflecting the outsized declines in Alphabet and Tesla, as well as Amazon (AMZN 233.66, -11.19, -4.57%) and Meta Platforms (META 606.10, -21.07, -3.36%).

Technology shares were not universally weak, however. The information technology sector lost 1.1%, but companies tied to AI infrastructure spending continued to outperform their hyperscaler customers. The PHLX Semiconductor Index slipped just 0.5%.

The day's losses were compounded by another sharp advance in oil prices. Crude oil futures settled $5.24 higher (+6.0%) at $92.09 per barrel after reports of Houthi attacks on commercial shipping in the Red Sea intensified geopolitical concerns. The move extended crude's weekly gain to roughly 13%, lifted Treasury yields across the curve, and prompted investors to further price in the possibility of additional Federal Reserve tightening.

According to the CME FedWatch Tool, markets now assign a 35.8% probability of a rate hike at next week's FOMC meeting, up from 11.8% just one week ago. The probability for a September rate hike has increased to 80.1%.

Despite the sharp decline in the major averages, weakness remained significantly more concentrated among the market's largest companies. The S&P 500 Equal Weight Index fell just 0.4%, while the Russell 2000 (-0.7%) and S&P MidCap 400 (-0.4%) both outperformed.

Elsewhere, there were several pockets of strength. The industrials sector (+1.8%) led all sectors behind well-received earnings from United Rentals (URI 1139.71, +104.65, +10.11%), Lockheed Martin (LMT 568.59, +54.23, +10.54%), and Thermo Fisher (TMO 572.32, +45.86, +8.71%), while the energy sector (+0.6%) also finished higher as oil prices rallied.

The defensive healthcare (+1.3%) and utilities (+0.5%) sectors also outperformed, with Quest Diagnostics (DGX 227.90, +18.07, +8.61%) surging after a beat-and-raise report of its own.

Ultimately, today's action reflected a market increasingly focused on the economics of the AI buildout. While investors grew more cautious toward the hyperscalers funding those investments, companies tied to AI infrastructure spending generally proved more resilient, even as rising oil prices and higher Treasury yields created a more challenging backdrop for growth stocks as a whole. 

U.S. Treasuries continued this week's retreat, sending yields on the 10-year note and shorter tenors to their highest levels since early 2025 while the 30-year yield stopped just shy of its highest level since late 2007. The 2-year note yield settled up six basis points to 4.36%, and the 10-year note yield settled up five basis points to 4.70%. 

• Russell 2000: +18.5% YTD
• S&P Mid Cap 400: +14.0% YTD
• S&P 500: +8.2% YTD
• Nasdaq Composite: +8.2% YTD
• DJIA: +7.6% YTD

Reviewing today's data:

• Weekly Initial Claims 187K (Briefing.com consensus 214K); Prior was revised to 209K from 208K, Weekly Continuing Claims 1.796 mln; Prior was revised to 1.798 mln from 1.805 mln
  
  • The key takeaway from the report is that the low level of initial claims is a signpost of a labor market that continues to see low firing activity, which is a good sign for continued increases in consumer spending.