S&P 500 Forecast: SPX tumbles as earnings revive AI worries, oil rallies

US futures       

Dow futures -1.2%, S&P futures -1.09%  & Nasdaq futures -1.56%

European futures

FTSE 0.8%,  DAX -1.5%

• US stocks drop with tech leading the declines
• Alphabet beats but huge capex spending unnerves investors
• US -Iran conflict deepens, raising inflationary pressures
• Oil rises towards $100 as supply fears intensify

U.S. stocks fall with tech jitters and inflationary worries rising

U.S. stocks are set to open lower on Thursday as concerns over massive AI spending have resurfaced following Alphabet's earnings, while rising oil prices amid a deepening Middle East conflict are also weighing on sentiment.

Despite Alphabet posting its strongest-ever quarter of cloud computing growth, the results failed to reassure investors because of the company's enormous spending plans.

Geopolitical concerns are also adding pressure as investors focus on disruption to shipping through both the Strait of Hormuz and the Red Sea. Brent crude has climbed to around $98 a barrel, its highest level since June.

The surge in oil prices has revived inflation concerns, pushing the two-year Treasury yield to a 17-month high ahead of next week's FOMC meeting.

Markets are now pricing in around a 33% probability of a 25 basis point Fed rate hike in July, up from just 12% a week ago.

Corporate Movers

Alphabet is falling more than 3% despite reporting strong second-quarter earnings.

The tech giant posted revenue of $199.8 billion, beating expectations of $197 billion, while adjusted EPS came in at $9.11, ahead of forecasts of $8.88. The earnings beat was driven by exceptionally strong cloud growth and resilient advertising revenue.

Google Cloud revenue rose 82% year-on-year, comfortably ahead of expectations for 63% growth, highlighting accelerating demand for AI services.

However, the market's negative reaction was driven not by the earnings themselves but by higher capital expenditure guidance.

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

The increased spending reflects the enormous investment required to build AI infrastructure and remain competitive in the race for artificial intelligence leadership.

However, the market's reaction suggests Wall Street is becoming increasingly impatient with Big Tech's enormous AI spending before meaningful returns have materialised.

Tesla is also trading lower in pre-market dealings. Although revenue beat expectations, profits fell sharply as the EV maker relied on discounts to drive sales while income from regulatory credits continued to decline.

Adjusted net income fell 17% year-on-year to $1.2 billion, well below expectations of $1.9 billion. That came despite a record 480,126 vehicle deliveries during the quarter, helping revenue rise 26%.

As growth in its core automotive business slows, Elon Musk continues to accelerate Tesla's shift towards autonomous taxis and AI-powered humanoid robots.

That strategy is also driving higher investment, with Musk saying Tesla expects to spend more than $25 billion in capital expenditure during 2026, almost triple last year's $8.5 billion.

S&P 500 Forecast – Technical Analysis

The S&P 500 has run into resistance around 7575 before pulling back.The index is now breaking below its rising trendline and testing support around the 50-day EMA at 7420.

With the RSI slipping below 50, sellers will look for a break beneath the 50-day EMA, opening the door towards 7350, the next area of horizontal support. A break below there exposes 7225, the June low.

If the 50-day EMA holds, buyers will look to reclaim 7575, creating a higher high and bringing 7620 and fresh record highs into focus.

FX Markets – Dollar Firms, GBP/USD Falls

The U.S. dollar has climbed to a three-week high against its major peers as safe-haven demand increases amid the escalating U.S.-Iran conflict and renewed concerns over AI spending. Higher oil prices are also adding to inflation concerns ahead of next week's FOMC meeting. Markets are now pricing in around a 33% probability of a Fed rate hike.

EUR/USD is falling after the ECB left its deposit rate unchanged at 2.25%. The central bank warned that the full inflationary impact of the renewed Middle East conflict has yet to be felt. Markets are currently pricing in around 48 basis points of additional tightening over the remainder of the year.

GBP/USD is extending losses below 1.3350 following softer UK inflation data and growing concerns over Prime Minister Andy Burnham's spending plans. Yesterday's data showed UK inflation eased to 2.6%, giving the Bank of England more time to assess the impact of higher energy prices before deciding whether further rate hikes are needed.

Meanwhile, expectations of higher government spending and increased borrowing under Andy Burnham are weighing on sterling by raising concerns over the UK's fiscal outlook.

Oil rises for a 5th day as supply concerns mount

Oil prices have risen for a fifth consecutive session, reaching their highest level in over a month after Yemen's Houthis attacked two Saudi oil tankers in the Red Sea, adding to supply concerns.

Crude is up almost 8% this week and around 27% so far this month as tensions between the U.S. and Iran continue to escalate.

Supply concerns now extend beyond the Strait of Hormuz, with the Bab el-Mandeb Strait also facing increasing disruption.

Goldman Sachs believes Brent could exceed $120 a barrel in the fourth quarter if disruption to the Strait of Hormuz continues, with further upside possible should the Bab el-Mandeb Strait also be significantly affected.

For now, the geopolitical risk premium is likely to remain in place and would only begin to fade if there were credible signs of a ceasefire between the U.S. and Iran.