U.S. stock markets closed lower on Tuesday following the escalation of war between the United States and Iran. Moreover, market participants remained concerned about the continuation of artificial intelligence (AI) trade due to highly overstretched valuations. All three major stock indexes ended in negative territory.
How Did the Benchmarks Perform?
The Dow Jones Industrial Average (DJI) fell 0.3% or 130.76 points to close at 52,925.15 after a choppy session. However, 18 components of the 30-stock index ended in positive territory and 12 ended in the red. In intraday trade, the blue-chip index touched an all-time high of 53,289.30. At the intraday low, the index was down nearly 282 points.
The tech-heavy Nasdaq Composite finished at 25,818.69, slipping 1.2% or 302.47 points on weak performance by AI giants. The S&P 500 lost 0.5% to finish at 7,503.85. Six out of 11 sectors of the broad-market index ended in negative territory while five finished in positive territory.
The Health Care Select Sector SPDR (XLV), the Utilities Select Sector SPDR (XLU) and the Consumer Staples Select Sector SPDR (XLP) fell 1.1%, 1% and 1.1%, respectively. On the other hand, the Information Technology Select Sector SPDR (XLK) advanced 1.7%.
The fear gauge CBOE Volatility Index (VIX) rose 3.6% to 16.13. A total of 17.5 billion shares were traded on Tuesday, lower than the last 20-session average of 23.3 billion. Advancers outnumbered decliners on the NYSE by a 1.3-to-1 ratio. On the Nasdaq, a 1.55-to-1 ratio favored declining issues.
Middle East War Escalates
The geopolitical conflicts in the Middle East heightened after Iran initiated a series of attack on oil and natural gas tankers using a U.S. Navy-protected route through the Strait of Hormuz. The U.S. force retaliated hitting over 80 targets of Iran including air defense systems, command and control networks, as well as anti-ship missile capabilities. The U.S. Treasury Department also revoked its authorization of Iranian crude oil sales.
Following these developments, prices of crude oil spiked. The U.S. benchmark — the West Texas Intermediate futures — rose 3% to settle at $70.44 per barrel. The global benchmark — the Brent crude futures — increased 3% to settle at $74.16 per barrel. As a result, stock prices of giant crude oil producers Chevron Corp.CVX and ExxonMobil Holdings Corp.XOM advanced 3.5% and 3.9%, respectively.
AI Trade Tumbles
A higher crude oil price has the potential to aggravate the inflationary situation. The sticky U.S. inflation rate is already elevated from the Fed’s target level. This implies that the central bank will not reduce the Fed fund rate anytime soon. On the other hand, the Fed may be forced to hike interest rate if the situation deteriorates. A higher interest rate will be detrimental to high-growth oriented AI-centric stocks.
Consequently, stock prices of Micron Technology Inc.MU and Advanced Micro Devices Inc. AMD plummeted 4.7% and 6.5%, respectively. Micron currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Economic Data
Trade deficits for goods and services jumped to $77.6 billion in May. However, the metric was below the Zacks Consensus Estimate of $79.1 billion. The metric for April was revised downward to $54.6 billion from $55.9 billion reported earlier.
May exports were $317.7 billion, a decrease of $10.5 billion from April exports. May imports were $395.3 billion, an increase of $12.5 billion from April imports. Year to date, the trade deficit for goods and services has decreased sharply by $203.9 billion or 40.6%.
Beyond Nvidia: AI’s Second Wave Is Here
The AI revolution has already minted millionaires. But the stocks everyone knows about aren’t likely to keep delivering the biggest profits. AI’s second wave is moving from infrastructure to implementation and these companies are at the forefront of this transition, positioned to become what Amazon and Google were to the internet era.
This article originally published on Zacks Investment Research (zacks.com).
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