Move over oil. AI leader Alphabet's spending sends investors running - Detroit Free Press

Move over oil. AI leader Alphabet's spending sends investors running

- Alphabet saw a 7.1% selloff, its worst day since May 2025, wiping nearly $300 billion from its market value.

- Meanwhile, General Motors stock rises after it issues improved full-year guidance.

Markets were driven by two themes the week ending July 24: a renewed geopolitical risk premium and growing investor unease over the cost of the AI race.

Starting with the political side of things, Brent crude climbed above $100 a barrel for the first time since May. The catalyst was a sharp escalation in the Middle East after Iran-backed Houthis attacked Saudi oil tankers in the Red Sea, while President Donald Trump said he was considering a "massive attack" against Iran.

The oil move rippled across asset classes. The two-year Treasury yield rose to 4.35%, its highest level since February 2025.

Markets now expect two Federal Reserve rate hikes over the next year, as traders priced in renewed inflation risks.

Notably, there's a nonnegligible 35% probability of a hike at next week's FOMC meeting.

Alphabet's AI bill scares investors

Alphabet Inc. reminded investors that AI leadership comes at an enormous price.

Second-quarter capital expenditures surged to $44.9 billion, twice last year's level.

The management also lifted full-year spending guidance to $195 billion-$205 billion while signaling another increase in 2027.

Free cash flow swung to a record negative $5.9 billion as AI infrastructure spending overwhelmed cash generation.

The result: a 7.1% selloff, Alphabet's worst day since May 2025, wiping nearly $300 billion from its market value.

The reaction reinforced a theme that's increasingly dominating Big Tech: Wall Street is becoming concerned about how much hyperscalers must spend to stay competitive in AI.

Tesla's AI spending hits a wall

Tesla Inc. suffered an even harsher verdict.

Shares plunged 20% for the week after quarterly earnings badly missed expectations. Adjusted EPS came in at $0.33 versus $0.53 expected, while operating margin collapsed to just 1.4%.

Like Alphabet, Tesla's biggest story wasn't weak sales, it was spending.

Capital expenditures jumped 142% year over year to $5.8 billion, largely tied to AI, robotics and autonomous driving, pushing free cash flow $1.1 billion into negative territory.

Defense and Detroit buck the trend

While AI spenders stumbled, defense stocks thrived.

Lockheed Martin Corp. jumped 10.6% after reporting a record backlog of $230.4 billion, supported by a $35 billion THAAD mobile missile defense contract and surging missile demand. RTX Corp. gained 7.7% after another beat-and-raise quarter, with both companies benefiting from expectations of higher U.S. defense spending.

General Motors Co. also stood out, rising roughly 10% for the week after delivering its 16th consecutive earnings beat and raising full-year guidance.

Benzinga is a financial news and data company headquartered in Detroit.