Recent indications that Alphabet and Tesla will increase their spending on artificial intelligence are spooking investors, as shares in two of the 'Magnificent Seven' companies plunged on Thursday
Shares in Elon Musk's Tesla fell more than 14 per cent to $320.52 per share as of 11.30am ET, while Google parent Alphabet was down more than 7 per cent at $317.45 per share.
In its quarterly earnings report on Wednesday, Alphabet raised its 2026 capex estimate to as high as $205 billion, citing strong AI demand. The latest projections from Google suggest AI appetite is growing.
The tech company's capex forecast overshadowed what was otherwise a strong second-quarter report. Alphabet reported cloud revenue of $24.77 billion for the three-month period ending on June 30, above analysts' expectations of $22.46 billion.
“A palpable sense of caution is pervading global markets after Alphabet reported stronger-than-expected second-quarter earnings but raised its capital expenditure forecast, reigniting concerns about the sustainability of the AI investment cycle,” said Karl Schamotta, chief market strategist at Corpay.
AI spending concerns and rising oil prices from the Iran war dragged down the broader US market, with the tech-heavy Nasdaq Composite shedding 2.78 per cent. The Dow Jones Industrial Average fell 621 points, or 1.19 per cent, while the S&P 500 lost 1.52 per cent.
“Until the outlook for the conflict becomes clearer, traders are likely to remain sensitive to oil price movements and incoming inflation data,” said John Canavan, lead analyst for Oxford Economics.
Meanwhile, Tesla said it expects more than $25 billion in capex this year after reporting a 142 per cent annual increase in the second quarter to $2.79 billion.
“Capacity build out and ramp related to our multi-year infrastructure initiatives, including AI compute, solar, battery material and semiconductor manufacturing, are under way,” the company said in its earnings presentation.
More than $5 trillion was already estimated to build out the AI ecosystem by 2030. And the four hyperscalers – Alphabet, Amazon, Meta and Microsoft – are driving a massive investment surge, with cumulative AI-related capex for this year projected at $650 billion, a 67 per cent increase from 2025.
Investors have been rewarding these hyperscalers with high valuations on expectations of large revenue gains, but some companies are now outspending their operating cash flow. Tesla's most recent earnings, for example, showed that it burnt through $1.09 billion in the second quarter, its first quarter of negative cash flow in more than two years.
Investors will soon turn their attention towards Amazon, Meta and Microsoft, which are all due to report next week, while chipmaker Nvidia is scheduled to report its latest earnings in August.
