AI frenzy pulls Wall Street higher despite DC debt woes

Traders work on the floor at the New York Stock Exchange in New York, Thursday, May 25. AP-Yonhap

Wall Street's building frenzy around artificial intelligence helped yank the stock market higher Thursday, even as worries worsen about political rancor in Washington.

The SP 500 rallied 0.9 percent after chipmaker Nvidia gave a monster forecast for upcoming sales as it benefits from the tech world's rush into AI. It helped the Nasdaq composite leap 1.7 percent, while the Dow Jones Industrial Average slipped 35 points, or 0.1 percent.

Because it's one of Wall Street's most valuable stocks, Nvidia's 24.4 percent surge was the strongest force pushing upward on the SP 500. Its forecast of roughly $11 billion in revenue for the current quarter blew past analysts' expectations for less than $7.2 billion. Nvidia's stock has already more than doubled this year, and its total value is approaching $1 trillion.

Stocks of other chip makers also charged higher after Nvidia described a race by its customers to put AI "into every product, service and business process." Advanced Micro Devices gained 11.2 percent.

Some Big Tech stocks rallied, adding to recent gains fueled by excitement about AI. The field has become so hot that critics warn of a possible bubble, while supporters say it could be the latest revolution to reshape the global economy. Microsoft gained 3.8 percent, and Google's parent company, Alphabet, rose 2.1 percent.

They helped lift indexes even as the majority of stocks fell on worries about the U.S. government edging closer to a possible default on its debt. Washington could run out of cash to pay its bills as soon as June 1, unless Congress allows it to borrow more.

The widespread expectation on Wall Street has been for Washington to reach a deal before it's too late, as it has many times before, because a failure would likely be awful for the economy. But bitter partisanship on Capitol Hill is hurting faith and trust in the government.

Fitch said late Wednesday that it could downgrade the U.S. government's "AAA" credit rating. It said it still expects a resolution before the U.S. Treasury runs out of cash, but it sees the risk of a mistake having risen.

"The brinkmanship over the debt ceiling, failure of the U.S. authorities to meaningfully tackle medium-term fiscal challenges that will lead to rising budget deficits and a growing debt burden signal downside risks to U.S. creditworthiness," Fitch said.

In 2011, Standard Poor's cut its "AAA" credit rating for the United States following a similar political squabble about the debt limit.

Another concern rests on exactly when the "X-date" deadline will hit for the U.S. Treasury to run out of cash.

While Isaac Boltansky, BTIG director of policy research, said he sees an 11th hour deal happening, "Washington is still arguing over exactly when midnight hits, which remains our primary concern as deadlines are the only viable forcing mechanism in town."

On the losing end of Wall Street was Dollar Tree, which fell 12 percent. The retailer reported weaker profit than analysts expected for the latest quarter. Customers are shifting spending toward less profitable products, and it's also contending with worse-than-expected theft like other retailers.

A smartphone with a displayed NVIDIA logo is placed on a computer motherboard in this illustration taken March 6. Reuters-Yonhap

All told, the SP 500 rose 36.04 points to 4,151.28. The Dow slipped 35.27 to 32,764.65, and the Nasdaq gained 213.93 to 12,698.09.

In the bond market, yields rallied after reports suggested the economy is in stronger shape than feared.

One said fewer workers applied for unemployment benefits last week than expected. That's a signal the job market remains remarkably solid, even as manufacturing and other areas of the economy slow under the weight of much higher interest rates.

Another report estimated the U.S. economy grew at a 1.3 percent annual pace in the first three months of the year, stronger than the 1.1 percent earlier thought. That report also suggested inflation was a touch hotter during the start of 2023 than earlier thought.

The stronger-than-expected data helped dampen investors' fears about a coming recession. But it could also convince the Federal Reserve to raise interest rates again next month. Traders are split on whether the Fed will take a pause in June after hiking rates at a furious pace for more than a year.

Higher rates have helped inflation to slow from its peak last summer, but they do that by slowing the entire economy and dragging on prices for stocks, bonds and other investments.

The yield on the two-year Treasury, which tends to track expectations for Fed action, jumped to 4.53 percent from 4.38 percent last Wednesday.

The 10-year yield rose to 3.81 percent from 3.74 percent. It helps set rates for mortgages and other important loans.

Stock markets abroad were mostly weaker, but the declines were milder than the prior day's.

Germany's DAX lost 0.3 percent after data showed its economy shrank in the first three months of the year, the second straight quarter that's occurred.

Hong Kong's Hang Seng fell 1.9 percent amid worries China's economic recovery after the government relaxed pandemic restrictions is losing steam. Stocks in Shanghai slipped 0.1 percent. (AP)