Stocks drop on AI fears, eyes on US midterms

Stock markets struggled Tuesday following another AI-fuelled tech selloff on Wall Street and as investors turned their attention to the pivotal US midterm elections.

Oil prices clawed back some of Monday's losses following reports that US forces had struck an Iranian island in the Strait of Hormuz.

"Investors were sitting uncomfortably as they waited with bated breath for the US midterm elections," said Dan Coatsworth, head of markets at AJ Bell.

Americans voted on Tuesday in the midterms with Democrats hoping to seize control of Congress and impose the first significant checks on US President Donald Trump's chaotic second term in the White House.

The election amounts to a nationwide judgement on Trump, with the mood turning sharply against Republicans amid anger over soaring living costs and the war against Iran.

Coatsworth added that "uncertainty around when energy prices will ease back has added to worries about excessive spending on AI, creating a cocktail of worries that is weighing on financial markets."

Earnings reports from titans including Amazon, Alphabet, Meta and Microsoft have shown they will keep pouring hundreds of billions of dollars into data centres and chips even as investors grow impatient for returns.

Monday saw Apple post forecast-topping sales and profits but warned that its gross margin -- the percentage of sales left after output costs -- would drop in October-December.

Asian tech giants came under renewed pressure, with shares in South Korea's SK hynix and Samsung tumbling, dragging Seoul's Kospi index down more than three percent on Tuesday.

There were also losses in Shanghai, though Hong Kong edged up. Tokyo was closed for a holiday.

In Europe, London, Paris and Frankfurt were all lower.

Oil prices climbed around two percent Tuesday after US media reported that Washington had launched limited strikes on an Iranian island in the Strait of Hormuz as Iranian media reported five explosions in quick succession.

The Wall Street Journal said that the strikes had not been publicly announced to avoid the impression Washington intended to resume major combat operations.

"The gains for now appear relatively limited, with hopes still swirling that negotiations will come to fruition, and that another big escalation in the conflict will be avoided," said Susannah Streeter, chief investment strategist at Wealth Club.

That came after prices had plunged more than seven percent on Monday on hopes of new talks between the US and Iran over a possible end to the eight-month-old conflict.