AI stocks lead Monday selloff as oil and rate fears hit markets

Stocks fell sharply Monday, and the pressure landed hardest on the AI trade that has carried a lot of market attention. For retail investors, the move matters because it tied together three big market drivers at once: geopolitical risk, inflation worries and the question of whether major tech companies will keep spending aggressively on artificial intelligence.

CNBC’s Investing Club with Jim Cramer said weakness in South Korea’s stock market spilled into U.S. trading, with most sectors lower. The Nasdaq, which is heavy in technology companies, dropped nearly 1.5%, according to the club.

Oil added another source of stress. CNBC’s Investing Club said crude prices rose after the U.S. and Iran exchanged strikes over the weekend, and after President Donald Trump reinstated a blockade on Iran in the Strait of Hormuz. The club also said Trump proposed a 20% toll on cargo moving through the waterway.

Higher oil can feed inflation because energy is a basic input across the economy, from shipping to manufacturing. That is why oil shocks often show up quickly in bond markets and in expectations for Federal Reserve policy.

Rate expectations moved fast

The 10-year Treasury yield climbed above 4.6% as oil rose, according to CNBC’s Investing Club. Bond yields move inversely to bond prices and often rise when investors expect higher inflation or tighter Federal Reserve policy.

Federal Reserve Governor Christopher Waller added to the pressure with a warning that another hot inflation reading could force the central bank to act. “If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term,” Waller said in a speech to the New York Association for Business Economics, according to CNBC’s Investing Club.

The Federal Open Market Committee, or FOMC, is the Fed group that sets interest rate policy. Higher rates can weigh on stocks because they make borrowing more expensive and reduce the present value investors assign to future profits, a key issue for growth companies.

The CME FedWatch tool now puts the chance of a Fed rate increase at the July 29 meeting near a coin flip, according to CNBC’s Investing Club. The club said those odds were about 25% a week earlier and 8% a month earlier.

AI spending is the next test

CNBC’s Investing Club said earnings season could determine whether the AI trade finds firmer footing. The key signal will be capital expenditure guidance, meaning company plans for spending on long-term assets such as data centers, chips and networking equipment.

The club pointed to Alphabet, Amazon, Microsoft and Meta Platforms as the major companies to watch. If all four raise 2026 capital spending guidance and keep pointing to investment growth into 2027, the club said that would support confidence in the AI spending cycle. A stronger focus on capital restraint would make the trade harder, according to the club.

Corning was one example of the volatility hitting AI infrastructure names. Citi raised its price target on Corning to $240 from $225, according to CNBC’s Investing Club, citing strength in optical connectivity tied to AI data centers, potential in advanced glass packaging substrates for next-generation semiconductors and growth in solar components.

Even with that Wall Street support, Corning shares have fallen about 30% in July after briefly trading above $260 in June, according to the club. The stock has returned to the level it first reached after Corning announced a multiyear partnership with Nvidia, CNBC’s Investing Club said.

No major earnings reports were scheduled after Monday’s close, according to the club. Tuesday brings results from Goldman Sachs, Wells Fargo, JPMorgan, Citigroup and Bank of America before the open, along with the June consumer price index. Economists surveyed by FactSet expect CPI to rise 3.8% from a year earlier and fall 0.1% from the prior month, according to CNBC’s Investing Club.

This story draws on original reporting from CNBC.