Recent signs that Alphabet and Tesla will increase spending on artificial intelligence are worrying investors, as the stocks of two of the Magnificent Seven companies plummeted on Thursday.
Elon Musk’s Tesla closed 14.52% lower at $319.69 per share, while Google’s parent company Alphabet closed 6.89% lower at $318.34.
In its quarterly earnings report on Wednesday, Alphabet raised its 2026 capital spending forecast to up to $205 billion, citing strong demand for AI. Google’s latest forecasts suggest that interest in AI is on the rise.
The tech company’s capital spending forecast overshadowed its strong second-quarter report. Alphabet reported cloud revenue of $24.77 billion for the three months ended June 30, which exceeded analysts’ expectations of $22.46 billion.
“There is a palpable sense of caution in global markets as Alphabet reported better-than-expected second-quarter earnings while raising its outlook for capital spending, reigniting concerns about the sustainability of the AI investment cycle,” said Karl Sciamotta, chief market strategist at Kopay.
Concerns over AI spending and rising oil prices due to the Iran war dragged the overall U.S. market lower, with the tech-heavy Nasdaq Composite Index down 2.78%. The Dow Jones Industrial Average fell 621 points, or 1.19%, and the S&P 500 fell 1.52%.
“Traders will remain sensitive to oil price developments and future inflation data until the outlook for the conflict becomes clearer,” said John Canavan, principal analyst at Oxford Economics.
Meanwhile, Tesla said it expects capital spending to be more than $25 billion this year, after reporting a 142% annual increase to $2.79 billion in the second quarter.
“Capacity additions and additions related to our multi-year infrastructure initiatives are underway, including AI computing, solar power, battery materials, and semiconductor manufacturing,” the company said in an earnings call.
It is already estimated that building an AI ecosystem will cost more than $5 trillion by 2030. Additionally, the four hyperscalers (Alphabet, Amazon, Meta, and Microsoft) are driving massive investment surges, with cumulative AI-related capital spending expected to be $650 billion this year, a 67% increase from 2025.
Investors have rewarded these hyperscalers with high valuations in anticipation of significant revenue growth, but some companies are now spending more than their operating cash. For example, Tesla’s latest financial results show that it spent $1.09 billion in the second quarter, its first negative cash flow in more than two years.
Investors will soon focus on Amazon, Meta, and Microsoft. All of these companies are scheduled to report next week, and semiconductor manufacturer Nvidia is scheduled to report its latest financial results in August.
Bloomberg’s Magnificent 7 Index, which tracks a fixed basket of seven large-cap U.S. tech stocks, fell 4.78%.
