U.S. stocks end down as OpenAI training halt weighs on AI trade, bonds extend rout

Wall Street on Monday kicked off a pivotal week for economic data on a negative note, weighed down by elevated oil prices and a continued rout in the U.S. bond market. The artificial intelligence trade also came under pressure after OpenAI halted training of its latest models.

Traders received some relief after crude prices pared their gains following media reports that President Donald Trump was open to Iran sanctions relief and the release of its frozen assets in exchange for concrete progress on the country’s nuclear program.

The tech-heavy NASDAQ Composite fell 0.9% to end at 26,820.38 points, the benchmark S&P 500 shed 0.8% to close at 7,684.98 points, and the blue-chip Dow Jones Industrial Average dropped 0.7% to settle at 51,481.72 points.
Resilient Wall Street gears up for inflation, jobs data
A spike in oil and Treasury yields have been the two big themes markets have been grappling with over the past two weeks. A lack of a diplomatic breakthrough between the U.S. and Iran on the sidelines of last week’s United Nations General Assembly in New York has boosted oil, as the two sides remain at contention over control of the Strait of Hormuz.

Meanwhile, energy-driven inflationary concerns, combined with worries over the massive amounts of debt being issued by companies to fund their AI infrastructure buildouts, a hawkish Federal Reserve signaling more rate hikes, and hot U.S. economic data have led to heavy selling in Treasury bonds, driving longer-term yields in particular to multi-year and multi-decade highs.
Still, Wall Street has remained resilient, largely on the back of technical factors such as soaring earnings expectations and a rebound in the AI trade last week amid surging traction for Meta Platforms’ new personal AI agent, Muse. The S&P 500 is just 1.5% below its last record close, while the NASDAQ Composite recovered all-time levels last week for the first time since early June.

This week market participants will be focusing on key data that could further shape Federal Reserve monetary policy outlook. The Fed nearly two weeks ago hiked interest rates for the first time in over three years and signaled more tightening ahead. The central bank will receive the latest measure on its preferred inflation gauge – the personal consumption expenditures (PCE) price index – on Wednesday.

It is also jobs data week, with the August Job Openings and Labor Turnover Survey scheduled for Tuesday and the highly-anticipated September nonfarm payrolls report on Friday.

“The U.S. economy’s resilience relies heavily on its strong workforce and booming AI investment, yet the former is now a double-edged sword, and the latter is on shakier ground. The outlook is difficult at best, and while tensions between the U.S. and Iran remain insurmountable, investors are right to be wary,” Yerbol Orynbayev, former World Bank governor of Kazakhstan, told Investing.com.

“Of course, the strength of the U.S. labor market this year has been a real bright spot, and a testament to the nation’s thriving business ecosystem. Right now, though, it leaves investors in a catch-22. Strong data on Friday increases the likelihood of another rate hike at the October FOMC meeting, pushing borrowing costs even higher, while any slowdown in hiring would ring alarm bells and raise stagflation concerns,” he added.
AI safety back in the spotlight
Turning to Monday’s market drivers, the AI trade was subdued, with the Philadelphia Semiconductor Index concluding nearly 2% lower. The moves came after OpenAI said it had paused the training of its latest AI models amid an increase in reports about AI agents going rogue.

The Associated Press on Sunday quoted OpenAI as saying it would resume training only when it was confident it had additional safeguards in place. The ChatGPT-developer added that it may have to pause training again in the future if issues emerge. This is the second training halt in three months for the world’s most prominent AI lab.

OpenAI’s decision follows its Friday disclosure that it was investigating incidents involving its agents searching federal government websites and acting in unexpected ways.

“The last thing the markets need is for the AI boom to come to a halt. Which is why, now more than ever, investors need AI regulation that still protects innovation,” Orynbayev told Investing.com.

“The U.S. economy, its workforce and the AI boom are all closely interlinked, with investors pouring billions of dollars into AI and related firms. Yet the ongoing run of AI models going rogue puts all of this at risk. It erodes trust and could spur investors to withdraw from the companies that are frankly propping up the U.S. economy,” he added.

Historic Treasury sell-off powers on
Technology stocks were also under pressure on Monday as Treasury yields extended their advance from last week. The benchmark U.S. 10-year yield was last up 5 basis points to 5.237%, sitting at its highest level since June 2007. The 30-year yield rose 4.9 basis points to 5.551%, after settling last week at its highest level since June 2004.
Rising yields can drive up borrowing costs, which in turn can make stocks of tech companies less attractive as the valuation of such firms is tied to their future projected profits.

The bond rout picked up last week after economic data showed solid U.S. business activity growth, boosting odds of a Fed rate hike in October.

“Despite the economy’s broad-based strength, equity markets are seemingly worrying about the potential future consequences of higher interest rates, with daily moves in rates increasingly driving overall market performance,” Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management, said.

“As is often the case, higher interest rates create both opportunities and challenges for investors. Despite the consternation surrounding their rise, bonds offer more attractive entry points today than at any time in nearly 20 years, assuming the Federal Reserve keeps inflation in check,” he said.

“Given the historical relationship between starting yields and forward returns, bonds are also increasingly likely to compete for investors’ new cash flows. A potential 6 percent return is likely not all that different from the future returns equities may offer in the next 10 years given today’s elevated valuations. For investors utilizing a traditional 60/40 portfolio, this may ultimately prove beneficial,” Schutte added.

Crude pares gains, but oil markets remain on edge
Turning to geopolitics, oil prices had initially surged on Monday, denting sentiment. The advance came after Trump on Saturday said he had rejected an Iranian proposal to reopen the Strait of Hormuz and halt hostilities.
“They want to make a deal, and I think that’s fine. I like making a deal too. But that deal would not be acceptable,” the U.S. president told reporters.

“What they want to do is immediately open the Hormuz strait. You know why? Because they’re dying. You know why they’re dying? Because they have no money coming in. Because they get their money from the Hormuz strait. So they outsmarted themselves,” Trump added.

Iran, for its part, reiterated that it would not soften its conditions for unblocking the maritime chokepoint, dampening hopes for an immediate diplomatic breakthrough.

But Al Jazeera, CNN, and Axios on Monday reported that Trump was ready to ease sanctions on Iran and release its frozen assets in exchange for concrete progress on the country’s nuclear program. The news helped oil prices quickly give up gains and briefly turn lower. Brent crude futures, the global benchmark, were last up 1.4% to $105.79 a barrel.