By Connor Smith | Wednesday, May 7

Still Paused. Tariff talk, a rate-cut decision, and hopes of easing chip export restrictions made a for a messy day of trading that gave way to modest gains—and that's before we get to Alphabet's artificial intelligence weak spot (More on that below.)

The Dow Jones Industrial Average rose 0.7%, while the S&P 500 rose 0.4%. The Nasdaq Composite was up 0.3%.

The day began with solid gains on news that U.S. and Chinese officials are set to meet in Switzerland this weekend to discuss trade. Of course, even those gains were fleeting, as the market turned around when President Donald Trump said in the White House that he was not open to pulling back tariffs to get China to negotiate. 

Asked what he wanted to come from the talks? "We'll see."

Trump's comments sent the major indexes falling in the minutes leading into the Federal Open Market Committee's decision to keep interest rates steady. BofA Global Research U.S. Economist Aditya Bhave points out that the FOMC only made a couple changes to its statement.

"The more important one was an upgrade to the Fed's assessment of economic uncertainty," Bhave writes. "Chair Powell's broad message was that uncertainty is high, and the Fed is comfortable staying on hold until there is greater clarity. His emphasis on a wait-and-see approach means the bar for a June cut is now very high."

My Barron's colleague Nicole Goodkind points out Powell used the word "wait" more than 20 times. Nicole was on the ground for Powell's presser, which she reports was standing room only.  

"Powell's message was both superbly boring and incredibly clear (in some regards, the opposite of what's coming out of the White House): Slow and steady wins the race," Nicole told me.

What did Wall Street think? Stocks traded sideways for much of the afternoon but rallied in the final minutes after Bloomberg reported the Trump administration planned not to enforce Biden-era restrictions on AI chip exports to certain countries.

Odds of a June rate cut fell to 19.8% from 30.5% on Tuesday, though a lot can happen between now and June 18.

DJIA: +0.70% to 41,113.97
S&P 500: +0.43% to 5,631.28
Nasdaq: +0.27% to 17,738.16

The Hot Stock: Charles River Laboratories +18.7%
The Biggest Loser: Alphabet -7.5%

Best Sector: Technology +1%
Worst Sector: Materials -0.6%

The AI Threat

Alphabet stock tumbled suddenly this morning and finished the day down 7.2%. It, along with Apple, was such a drag, that the Nasdaq was down for most of the session. The culprit? AI.

The drop followed testimony from Eddy Cue, Apple’s senior vice president of services, in a Department of Justice lawsuit against Google. Cue said Google searches in Apple's browser fell for the first time last month, according to Bloomberg.

My colleague Angela Palumbo reports that the testimony suggests artificial intelligence is taking market share from traditional search. Angela writes:

In 2024, Alphabet added a warning to the risk section of its 10-K annual report. “Other companies may develop AI products and technologies that are similar or superior to our technologies or more cost-effective to develop and/or deploy,” the company said in the filing.

Melius Research analyst Ben Reitzes rates Alphabet as a Hold with a $166 price target. He wrote in a note on Wednesday that “today could be a historic turning point in Alphabet sentiment.”

“Just trust your eyes and ears—people are going to ChatGPT (and others) for search-equivalent queries more and more,” Reitzes said.

Meanwhile, in August, a U.S. judge ruled that Google was a monopolist in general search services and general text advertising. One potential remedy to that search monopoly could prevent the exclusive agreements that have made Google the default search engine on different devices, including the iPhone.

In total, Alphabet shed $147 billion in market cap today, according to Dow Jones Market Data.

You can read more of Angela's coverage here.