An escalation in the Iran conflict has driven oil prices sharply higher, pulling both stock and bond markets down. At the same time, renewed worries about whether massive investments in artificial intelligence will yield returns are impacting Wall Street sentiment.

As of 10:00 a.m. in New York, the S&P 500 and Dow Jones Industrial Average had each fallen 1%, while the Nasdaq 100 shed 1.5%. Large-cap tech stocks bore the brunt of the selloff, as the start of earnings season offered little comfort to traders. Despite solid results, Alphabet Inc. slid 6% after raising its capital expenditure forecast. Tesla tumbled 13%, as its profits declined even with strong electric vehicle delivery figures.

US President Donald Trump stated he would hold Iran accountable if Yemen's Houthi rebels launch further attacks on Red Sea vessels. This could expand US involvement in the Middle Eastern war, which shows no signs of abating. Iran-backed Houthi rebels earlier claimed to have attacked two Saudi Arabian oil tankers.

Sameer Samana of Wells Fargo Investment Institute commented, "The escalation in Middle East tensions has pushed crude oil prices higher, fueling concerns that inflation could accelerate again, delaying any relief on interest rates, or even prompting the Federal Reserve to hike. We believe oil prices will eventually normalize, but we also recognize things could get worse before they get better."

As the conflict escalates, Wall Street is seeking more compelling evidence that corporate bets on artificial intelligence are driving new growth, rather than eroding profits. Beyond Alphabet, Meta Platforms, Microsoft, and Amazon said in April they would spend up to $725 billion this year to pursue their AI ambitions.

Matt Maley of Miller Tabak noted, "It's still too early to draw conclusions. Next week, we'll see earnings from more of the hyperscale cloud providers. So, we can't yet say their reports are triggering negative market reactions like chip stocks have. However, the current moves are certainly amplifying concerns about a 'buy the rumor, sell the news' phenomenon."

Maley also pointed out that geopolitical issues are becoming more prominent, which is not helping risk assets. "Over the past few months, the stock market has been able to absorb rising yields. But with yields hitting new highs for the year, this factor could soon pose at least some headwinds for the market," he said.