AI spending rattles investors as US tech giants face post-earnings sell-off

Shares of Alphabet and Tesla plunged on Thursday after both companies reported negative free cash flow in their latest quarterly earnings and signaled plans for even heavier investment in artificial intelligence.

Tesla shares closed 14.5% lower, wiping out about $200 billion in market value and marking the stock's worst single-day performance since March 2025. Meanwhile, Alphabet, Google's parent company, tumbled 7.1%, losing roughly $300 billion in market capitalization.

Soaring AI spending overshadowed stronger-than-expected revenue in Q2, as investors grew increasingly concerned about the rapid expansion of capital expenditure.

Alphabet lifted its capital expenditure forecast for the year to between $195 billion and $205 billion, up from its previous estimate of $180 billion to $190 billion, while warning that spending could rise further in 2027.

The company's CFO Anat Ashkenazi told analysts that the increase was "primarily due to an acceleration in the delivery of capacity to meet growing demand."

Meanwhile, Tesla's capital expenditure surged 142% year-on-year to $5.79 billion in the second quarter, driven by increased spending on self-driving technology, artificial intelligence and robotics initiatives. The company also raised its capex outlook for this year to more than $25 billion.

"This is a massive capex year. I'm confident that all the things that we're investing in will yield incredible returns," Tesla CEO Elon Musk said.

But there is still a healthy degree of skepticism about the ability of these investments to generate a commensurate level of return, according to AJ Bell investment director Russ Mould, Reuters reported.

"Tesla's and Alphabet's earnings are two sides of the same coin," said cross-asset analyst Nic Puckrin, in an interview with Business Insider. "Tech giants are spending on AI like there's no tomorrow, but investors have realized it's tomorrow they care about," he noted.