$700B Wiped From the S&P 500 as Iran Talks Stall and Fed Governor Expects Higher AI Inflation

Nearly $700 billion was erased from the combined market value of S&P 500 companies on Monday, while the Dow and Nasdaq also fell 0.7% and 0.9%, respectively, as Wall Street braced for rising oil prices and Treasury yields, a worsening US-Iran settlement outlook, and a higher inflation warning from the rapid AI buildout.

US President Donald Trump reportedly turned down Tehran's proposal to end hostilities and reopen the Strait of Hormuz, only to signal later that US negotiators could resume talks with Iranian officials this week.

Elsewhere, Iranian officials have privately expressed doubts about reaching an agreement with Washington before the November US midterm elections, according to a Monday Bloomberg report. The officials reportedly said that talks held around the United Nations General Assembly in New York last week made little progress, while distrust remains high on both sides.

Iran wants sanctions relief as well, while Washington is seeking firm commitments concerning the waterway and Iran's nuclear programme. Elsewhere, Federal Reserve Governor Lisa Cook warned that the enormous investment behind the AI boom could keep adding to upward inflationary pressure.

Cook Says Labour Market Positioned to Handle Rate Hikes

In a speech on Monday, Cook said AI-driven demand is already contributing to inflationary pressure and could continue doing so in the coming months.

She believes the rapid AI buildout is drawing heavily on resources such as construction, labour, and energy, which are also needed elsewhere in the economy. That means the scaling of data centres could create price pressures beyond the technology sector itself.

Cook noted that companies have so far spent only a small fraction of the roughly $2 trillion in announced AI investment plans. She also pointed to electricity and water costs rising by around 5% over the past year, while core goods prices were running at more than a 3% annual pace so far this year.

In the near-term, 'I expect to see continued pressure on inflation from the AI buildout... and from the pass-through of higher oil prices and supply chain disruptions associated with the conflict in the Middle East,' Cook stated.

However, she believes the labour market looks well-positioned to handle an increase in interest rates.

'This year, the unemployment rate has been trending down... Other indicators also show a labor market that is roughly in balance and gradually improving. Payrolls have increased, job openings have ticked up, and initial unemployment claims have trended lower,' Cook added.

The Market Is Now Watching Oil, AI, and Rates Together

Monday's sell-off, therefore, exposed a more complicated threat to US stocks than a single geopolitical headline.

Iran threatens to keep energy prices elevated, and higher oil prices increase the risks of prolonged inflation. AI investment is simultaneously creating demand for energy, construction, and other resources. And rising inflation can keep pressure on interest rates, reducing the relative appeal of richly valued growth stocks.

The 10-year US Treasury yield climbed to 5.23%, its highest level since 2007, according to Associated Press.

With Iran talks potentially continuing while Tehran doubts a settlement before the November midterms, investors may have to contend with the same three-way pressure of geopolitics, AI inflation, and interest rates for weeks to come.

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