Market Indexes Sink as Oil Tops $100 Amid Rising AI Costs

The major indexes are under broad pressure on Thursday. Investors process what it actually costs to build the AI future everyone keeps talking about, and the Iranian conflict is driving oil prices higher.

The Nasdaq Composite (NASDAQINDEX: ^IXIC) is down 2.6% at 11:54 a.m. ET, taking the worst of the damage. But everything is down, just by different amounts. The S&P 500 (SNPINDEX: ^GSPC) has dropped 1.4%, while the Dow Jones Industrial Average (DJINDICES: ^DJI) is down 1%.

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Alphabet and Tesla results inspire price drops

Most of the Magnificent 7 companies are reporting earnings this week or next, and the first two reports got a chilling market response.

Tesla (NASDAQ: TSLA) is down 14.2% on a classic earnings miss. The company beat revenue estimates with a 25% year-over-year jump to $28.2 billion, but missed earnings by a wide margin, posting $0.33 per share versus Wall Street's consensus target of $0.49 per share. Auto gross margins shrank to 16.3% excluding regulatory credits, and management said full-year capital expenditure will top $25 billion for compute infrastructure, Optimus robots, and Robotaxi development. Investors are clearly not thrilled about the margin compression.

Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) is down 7% despite crushing analysts' estimates. Revenue hit $119.8 billion, up 24%. Google Cloud revenue surged 82%, proving that AI is absolutely generating real money on the software and services side. But management raised Alphabet's full-year capital expenditure guidance by $15 billion and said that next year's infrastructure investments will be even larger. Free cash flow turned negative at negative $5.9 billion for the quarter as AI data center spending doubled year-over-year. Alphabet was the heaviest drag on the S&P 500 and Nasdaq Composite indexes, and also erased 142 points from the Dow.

Image source: Getty Images.

Oil isn't helping the mood. Brent crude briefly touched $100 per barrel this morning after reports of attacks on oil tankers near the Red Sea. Remember the Suez Canal obstruction throwing global trade for a loop in 2021? Closing down that waterway and the Strait of Hormuz at the same time would result in skyrocketing prices for oil and general merchandise.

It's not all bad news, though. Honeywell Technologies (NASDAQ: HON) is up 6.8% after reporting second-quarter earnings per share of $1.95, beating the analyst estimate of $1.82 by $0.13. It was the Dow's top gainer this morning, driven by strong sales of building automation and industrial automation products.

What happens next

Alphabet's report set the stage for another four Magnificent 7 updates next week. The AI boom is real, and you're getting a ton of valuable performance data right now. On the other hand, the picture is muddled by oil prices and inflation fears. Major banks disagree on where the economy is going as a whole, though most expect the Federal Reserve to increase interest rates again before the end of 2026.

For investors, the message is clear: AI revenue growth is real, but so are the infrastructure bills. With oil prices threatening $100 per barrel and interest rates stuck near 4.7%, the twin pressures of energy costs and elevated borrowing rates are making those massive capex commitments harder to justify. The market is demanding proof that all this spending will eventually translate into sustained profitability.

Anders Bylund has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Honeywell Technologies, and Tesla. The Motley Fool has a disclosure policy.