U.S. technology shares fell for a second consecutive week as investors grappled with the financial implications of massive artificial intelligence investments. The Nasdaq Composite declined 2.0% on the week, while the S&P 500 slipped 0.6%, reflecting growing unease about the sustainability of capital spending among major tech players.
Alphabet (NASDAQ:GOOGL) and Tesla (NASDAQ:TSLA) both reported quarterly capital expenditures that exceeded their operating cash flow, a milestone that signals heightened financial pressure. Alphabet posted $44.9 billion in capex against $39.1 billion in operating cash, while Tesla's capex of $5.8 billion outpaced its $4.7 billion in operating cash. This resulted in negative free cash flow for both companies, with Alphabet at -$5.9 billion and Tesla at -$1.1 billion.
The capex-to-operating-cash ratio, a straightforward measure of financial strain, stood at 115% for Alphabet and 123% for Tesla. When this ratio exceeds 100%, companies must tap into reserves or seek external funding to support expansion. Alphabet addressed this by raising $49.6 billion through common stock and mandatory convertible preferred shares, along with an additional $20.3 billion from senior notes. The combined proceeds amounted to roughly 1.6 times its quarterly capex, with equity proceeds specifically earmarked for AI infrastructure.
Despite these moves, Alphabet's cash position remains robust at $242.5 billion in cash, equivalents, and short-term marketable securities. However, the key issue is capital returns. The company raised its 2026 capital expenditure outlook by $15 billion, setting a new range of $195 billion to $205 billion. Google Cloud revenue surged 82%, but that failed to reassure investors, sending shares down nearly 7% on Thursday.
Tesla reported strong revenue growth of 26% and record quarterly deliveries, but capital expenditure jumped 142% while operating margin declined to 1.4%. Shares fell over 14% on Thursday. Intel (NASDAQ:INTC) also faced headwinds, dropping 7.9% on Friday despite providing forecasts that exceeded Wall Street expectations. CFO Dave Zinsner noted the company was "meaningfully increasing" spending on equipment, clean rooms, and substrates.
Peter Andersen, CEO of Andersen Capital Management, cited a "fear of massive overbuilding" that now extends to software, vehicles, and semiconductors. This sentiment is compounded by changing macroeconomic conditions. Brent crude oil finished at $96.78 per barrel, having briefly topped $100, while the yield on the 10-year Treasury hit 4.679% and the 30-year rose to 5.163%. Fresh tariffs on imports from 60 trading partners introduced an additional source of inflation, further pressuring tech valuations.
Looking ahead, the Federal Reserve is scheduled to meet on July 28-29, with markets pricing in about a 33% probability of a rate hike. Preliminary second-quarter GDP figures and June inflation data will be released Thursday. Meanwhile, earnings reports from Microsoft (NASDAQ:MSFT), Meta Platforms (NASDAQ:META), Amazon.com (NASDAQ:AMZN), and Apple (NASDAQ:AAPL) are due next week, with Microsoft on Wednesday and Apple on Thursday. Investors will focus on both cloud demand and cash generation.
A Reuters analysis indicates that by 2027, four hyperscalers could have capital expenditures that exceed their free cash flow, underscoring the long-term risks. For now, companies will likely need to deliver on both demand and self-funding to come out ahead next week. Meeting expectations for revenue growth alone is no longer sufficient.
