The worrying sign for Wall Street’s hyperscalers following Alphabet’s Q2 2026 earnings is that it’s not enough to beat revenue expectations anymore; investors demand capex control. 

Alphabet (NASDAQ:GOOGL) tumbled 7.7% following its earnings call, which was largely comprised of good news. The Google parent recorded its 12th consecutive quarter of strong revenue gains, comfortably beating expectations. 

In terms of revenue, Alphabet’s quarterly results weighed in at $119.8 billion compared to $116.93 billion expected by LSEG, while adjusted earnings per share (EPS) fell $0.04 short of expectations, reaching $2.85. 

Alphabet’s cloud businesses also recorded more than $24 billion throughout the quarter, while its net profit tripled to more than $112 billion. 

The Google Gemini app also posted significant growth, with a confirmed 950 million monthly active users. 

Despite this, Alphabet’s stock experienced a steep decline due to more signs that the company’s capital expenditure is gathering momentum. With sell-offs triggered by the Google parent’s quarterly earnings, investors may be set for a period of heavy volatility for Wall Street hyperscalers as capex continues to fall under the microscope. 

Why are Investors Selling Alphabet? 

Wall Street’s Magnificent Seven collective of AI-focused market giants has continued to stagnate as investors come to terms with heavy capital expenditure trends. 

The seven tech leaders, consisting of Alphabet, Amazon (AMZN), Apple (AAPL), Meta (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (NASDAQ:TSLA), have planned to spend more than $700 billion on artificial intelligence capex in 2026, representing a significant step up from the $400 billion spent in 2025. 

However, it’s this heavy spending on AI infrastructure that is prompting widespread revisions over the long-term value of hyperscalers. 

The reason investors are selling Alphabet stock despite its Q2 revenue beat is that the company increased its capital expenditure estimate for the full year to $205 billion, representing another jump from the $190 billion recorded last quarter. 

Alphabet’s chief financial officer, Anat Ashkenazi, put the capex increase down to growing demand and the company’s attempts to accelerate the delivery of capacity to accommodate it. She also confirmed that there’s an expectation that capex will continue to increase "significantly" in 2027, with more details set to be revealed at a later date. 

"Investors are uneasy about capex because Alphabet’s price-to-earnings (P/E) ratio currently stands at 26.48x, and speculative spending opens the door to more uncertainty over whether the company can ever reach such lofty revenue streams in the future," explained Vsevolod Smirnov, CMO at Just2Trade.

"Alphabet has more than tripled in value during the AI hype phase, and its recent struggles are merely a result of investors looking at the stock’s fundamentals and asking ‘what’s next?’" 

Earnings Fears for Mag7

Another stock that’s been more heavily impacted by Q2 capex is Tesla, which revealed that capital expenditures have surged 142% year-on-year in the second quarter to $5.79 billion, with more than $25 billion in capex expected this year. 

With a seismic P/E of 347x, Tesla’s stock is more prone to coming under investor scrutiny, and its losses of more than 13.5% since Wednesday morning suggest that there’s set to be far more volatility ahead as spending continues to increase. 

Although Tesla isn’t a hyperscaler by definition, its spending mirrors concerns about the rate of spending throughout its high-tech counterparts. 

At their current capex rates, LSEG has estimated that the likes of Alphabet, Amazon, Microsoft, Meta Platforms, and Oracle are set to spend more on their capital expenditures than they generate in free cash flow by 2027, which directly calls into question the sustainability of these major AI buildouts. 

Make or Break Earnings Season

The challenges faced by Alphabet and Tesla have underlined the importance of the upcoming earnings season for the Magnificent Seven and hyperscaler firms. 

Over the weeks ahead, we’re likely to see far greater levels of volatility as investors seek out indications as to whether runaway spending rates are set to continue impacting stocks for the foreseeable future. 

Worryingly, with the likes of Alphabet and Tesla already confirming that more spending is on the way, Q2 earnings could become a difficult period if more Mag7 players follow a similar trajectory, even despite revenue beats. 

Capital expenditures will be firmly in the spotlight during the weeks ahead as we continue to look for cues as to whether more spending is ahead and if their impact could drive more doubt about the sky-high valuations throughout the S&P 500’s leaders. 

What’s Next for the AI Rally? 

The stuttering start to Q2 earnings season will be fuelling claims that we’re in the midst of an AI bubble, but it’s also worth remembering that the scale of the potential that the technology holds is unprecedented compared to previous tech bubbles on Wall Street. 

Last year’s estimates from UN Trade & Development suggested that the AI market was projected to reach a value of $4.8 trillion by 2033, cementing its emergence as a dominant frontier technology. 

This could assist high-spending hyperscalers in living up to their valuations despite significant free cash flow risks in the short term. 

This uncertainty over the trajectory of the AI boom will fuel more volatility in the wake of earnings season, which could provide some short-term trading opportunities for investors who are more bullish on the future prospects of the industry. 

Disclosure: On the date of publication, Dmytro Spilka did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer. Dmytro Spilka does not intend to make a trade in any of the securities mentioned above in the next 72 hours.

Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.