U.S. stocks pare most of their losses as pullback in oil offsets technology slide

Wall Street on Monday kicked off the week with a volatile trading session, as investors dealt with a flurry of headlines on artificial intelligence and the Middle East. The main averages opened deep in the red amid surging oil prices and after major figures in the AI industry called for a slowdown in its development, hitting technology stocks.

But crude benchmarks have since pared their advance following an encouraging comment from President Donald Trump and an Iranian media report about the possibility of a deal, helping offset the fall in tech.

Meanwhile, market participants are also looking ahead to what could be one of the most consequential Federal Reserve interest rate decisions in recent years on Wednesday. The central bank is anticipated to tighten policy for the first time since July 2023.  

At 14:43 ET (18:43 GMT), the tech-heavy NASDAQ Composite was down 0.1% to 26,293.00 points, having earlier fallen as much as 1.3%. The benchmark S&P 500 shed 0.3% to 7,637.73 points, eating into a decline of as much as 0.8%. The blue-chip Dow Jones Industrial Average fell 0.2% to 52,471.05 points after earlier dipping as much as 0.6%.

"Given the shifting AI sentiment, the Federal Reserve’s sticky inflation problem, and escalations in the Middle East, the outlook is challenging to say the least. And global conditions are sure to get rockier before they get smoother – investors must be ready to weather them, avoid overextending during market rallies, and look for growth opportunities where possible," Yerbol Orynbayev, former World Bank governor of Kazakhstan, told Investing.com.

Uproar over AI safety 

It has been a wild weekend for the AI industry, sparked by a lengthy blog post penned by Anthropic CEO Dario Amodei calling for a slowdown in the development of the technology. The executive said AI firms should decelerate the rate of advancement in the cutting-edge models they are racing to construct and deploy, underlining increasing concerns over the possibility that these systems will be misused.

"Progress will still seem fast, and we must make wise use of the time we gain," Amodei wrote. The statements came after Anthropic revealed last week that several actors had used its Claude AI models in everything from weapons development to fraud.

Concerns over AI safety picked up steam last week after Anthropic’s Jacob Coxon resigned, saying that he had spent the last three years working on "pretraining research at both OpenAI and Anthropic. Neither company is acting responsibly. They are racing straight to self-improving superintelligence and gambling with our lives."

"The people building AI earnestly believe that it could kill us all by the end of the decade," Coxon said on social media. Anthropic scientist Evan Hubinger then weighed in, saying Coxon was correct. "We really do earnestly believe AI could kill all humans! I personally think it is >10% within the next decade," Hubinger said.

Amodei in his weekend post proposed a three-step plan for the AI slowdown, with the first major step being Anthropic committing to giving an embedded team of third-party evaluators "ongoing, employee-like access" to verify the company’s safety practices and assess the alignment of its models and training pipelines.

Other AI industry tycoons backed Amodei, including OpenAI chief executive Sam Altman, xAI founder Elon Musk, and Demis Hassabis, co-founder and chair of Alphabet’s Google DeepMind.

For U.S. markets, the calls to slow AI development could potentially be a major negative catalyst.

The rise of the nascent technology into commercial markets in late 2022 led to tremendous valuation gains for several U.S. behemoths, lifting Wall Street to record levels and taking the benchmark S&P 500 to a level of 7,600 points from about 4,000 points, swelling the index’s capitalization by tens of trillions of dollars.

U.S. chip stocks could possibly see the biggest hit to sentiment, as they have been outsized beneficiaries of the AI boom. The industry for high-performance chips to help power AI processes has exploded, helping companies such as Nvidia become the largest in the world. The Philadelphia Semiconductor Index, the flagship gauge for chip stocks, has soared a staggering 318.3% since the launch of OpenAI’s ChatGPT in November 2022.        

On Monday, the S&P 500 technology sector dropped 1%. The SOX shed 4.9%, with Arm, Lam Research, ASML, and Marvell among the top percentage losers on the Nasdaq. On the other hand, cybersecurity stocks such as CrowdStrike and Palo Alto surged and were among the top percentage gainers on the Nasdaq.

Trump criticizes Amodei, defends AI

Trump on Sunday said a lot of "negative forces" were bringing up the concerns over AI and told reporters that he wanted to ensure that the U.S. would maintain its lead over China in the industry. 

"The only control or ’guardrails’ that AI needs is a STRONG AND SMART (High IQ!) PRESIDENT, and the U.S.A. has that, in spades! The Trump Administration has stopped AI ’people’ from doing bad, or potentially bad, ’things,’ like Dario (Anthropic!), who is now pretending to be a ’perfect little angel’ - and we will continue to do so!" the U.S. president posted on his Truth Social service on Monday. 

"There is a SICK conspiracy going on against AI and Data Centers, and the only one that is happy about it is China. WHOEVER WINS AI, WINS! We are leading China, and all others, and will continue to do so," he added.

"Concerning AI, when, in the History of Business, did anyone see the Leaders of an Industry call for Regulation that, if strongly implemented, will drive them into oblivion and bankruptcy? AI taking over the World, destroying Humanity, and all other things bad, is a HOAX," the president said in a follow up post. 

China also pushed back against the calls for a slowdown.

"AI is a consequential technology for the wellbeing of all humanity. All parties should jointly promote the open and inclusive development of AI for good and for all. Fear-mongering, confrontation and vicious competition will only hamper efforts toward sound global AI governance, which serves no one’s interest," China’s Foreign Ministry Spokesperson Guo Jiakun told reporters on Monday.

U.S. open to ’concept’ of Iran deal

Turning to the Middle East, oil prices had initially surged on Monday, building upon a nearly 20% two-week surge. The advance has been driven by jitters over a potential hit to oil supply amid a resurgence in military strikes between the U.S. and Iran and a widening conflict between Saudi Arabia and Iran-backed Houthis in Yemen.

Traders had taken some hope at the end of last week after news of a scheduled meeting between Gulf powers and Iran to secure a deal to manage commercial shipping through the Strait of Hormuz. However, the meeting, which was set for Monday, has been postponed. Oman’s foreign minister said the gathering was delayed "in the interests of consensus."

Iran’s foreign ministry added that the country would coordinate with Oman to set up another suitable date for the meeting, according to Fars News Agency. Previously, Iranian officials had said they would present an agreement with Oman to Gulf Arab states on reopening Hormuz, a narrow waterway bordered by Iran and Oman through which roughly a fifth of the world’s oil and liquefied natural gas flowed before the Middle East conflict began in late February.

But Trump on Monday morning said Iran wanted to make a deal, "quickly and badly."

"I will determine whether or not the U.S.A. will choose to engage - The concept of which we are open to," the president added. 

Elsewhere, the Iranian Labor News Agency (ILNA) said the U.S. was seeking a "step-by-step" agreement with Iran in what could be the preclude to Washington returning to negotiations, citing Pakistani sources. 

Oil prices pared gains after Trump’s comment and ILNA’s report. Brent crude futures, the global benchmark, were last up 0.5% to $105.01 a barrel, having earlier hit as high as $109.74. 

Energy-driven inflation to drive anticipated Fed hike

The recent surge in oil prices have also played a part in firming expectations for a quarter-point rate hike by the Fed on Wednesday. According to the CME FedWatch tool, the chances of a hike stand at 92.5%.  

Key U.S. consumer and producer inflation data last week tipped the scales towards the hike, coming after a blockbuster August nonfarm payrolls report. Additionally, a relentless rout in the U.S. bond market has boosted yields to multi-year highs and driven up borrowing costs, further compounding the outlook for monetary policy tightening.

If the Fed were to hike, it would be the first since July 2023. 

"Friday’s CPI reading has the markets betting strongly that we will see a rate hike later this week from the Federal Reserve. For good reason, too: the bond market is teetering, and the Fed has now exceeded its 2% inflation target for well over five years. Anything other than a rate hike could leave the Fed in a precarious position," Orynbayev, former World Bank governor of Kazakhstan, told Investing.com.

"Amid all the political complications, the bottom line is that inflation cannot remain at its current heights, and the Fed must pull any lever in its arsenal to combat it," he added.  

Ambar Warrick and Scott Kanowsky contributed to this article