Key Takeaways from the 2026 Second Quarter Earnings Season
Alphabet, the parent company of Google, raised its 2026 capital expenditure forecast, sparking a sell-off in shares of Amazon, Meta, and Microsoft, even as its cloud business reported accelerated growth. The other three major cloud service providers are all set to release their earnings results later this week.
Analyst Mark Mahaney of Evercore ISI believes that Alphabet's increased spending will likely prompt Amazon and Microsoft to follow suit with higher investment plans. Current stock prices show Alphabet (ticker GOOGL) up $0.77, or 0.24%; Amazon (AMZN) down $1.45, or 0.63%; Meta (META) up $0.51, or 0.09%; and Microsoft (MSFT) up $6.96, or 1.79%.
Alphabet's Capital Spending Plan Triggers Selloff
For a long time, Alphabet was Wall Street's favorite among the hyperscale cloud providers, praised for its ability to efficiently convert high capital expenditures into revenue. However, alongside its second-quarter earnings report on Wednesday, Alphabet announced an upward revision to its 2026 capital spending plan. The internet giant's accelerated construction of data centers to support artificial intelligence drew widespread investor dissatisfaction. Shares of Google's parent company fell 7% on Thursday, dragging down Amazon.com (AMZN), Meta Platforms, Inc. (META), and Microsoft (MSFT). This reflects the market's increasingly stringent review of infrastructure investments, as massive spending depletes cash reserves while the returns on investment remain highly uncertain. All three major tech companies are reporting quarterly earnings this week.
In previous quarters, increases in capital expenditure were generally welcomed by the market, seen as a sign of strong demand and healthy order backlogs. Alphabet had the best reputation on Wall Street, with its stock price climbing about 70% over the past year. Google Cloud's infrastructure business grew faster than its peers, and its Gemini large language model and related services successfully carved out a market share in a space dominated by OpenAI and Anthropic. But after last week's earnings release, the market's unconditional tolerance for Alphabet's high spending evaporated.
Evercore ISI's internet research head, Mark Mahaney, wrote in a note Wednesday that Alphabet's increased capital expenditure raises the probability that Amazon and Microsoft will also boost their spending. Microsoft (MSFT) and Meta Platforms, Inc. (META) are set to report earnings after the U.S. market close on Wednesday, being the first to face investor scrutiny on investment returns. Amazon's earnings are scheduled for Thursday. Microsoft (MSFT) provided full-year guidance of $190 billion for total capital expenditure and finance leases in April. The scramble for AI chips has tightened memory supply, and rising component prices have directly pushed up costs by $25 billion.
Cowen analyst Derrick Wood commented, "Given the market's reaction to Google's stock price decline last week, if Microsoft raises its capital expenditure again, it will likely trigger selling pressure." According to Visible Alpha, the analyst consensus for Microsoft's full-year capital expenditure stands at $190.1 billion. Following Google's earnings, Visible Alpha's market expectations for Amazon's full-year capital expenditure rose by nearly $2 billion to $207.4 billion.
Growing Fatigue with AI Investments
Amazon guided for $200 billion in capital expenditure for 2026 in February, at the time the highest among the four cloud giants, until Alphabet raised its own spending range cap to $205 billion. Amazon maintained its previous spending guidance in April, with CEO Andy Jassy telling investors that "the overall investment plan is essentially unchanged." This month, several analysts predicted in their reports that Amazon will likely increase its full-year capital expenditure. Reasons include business expansion in AI, custom chip development, satellite internet, and other capital-intensive new ventures, coupled with rising memory chip prices.
Jack Dorheid, CEO of long-term asset management firm Longbow and a major holder of Amazon shares, wrote in an email that the market is experiencing AI fatigue, with the sudden surge in capital expenditure facing widespread skepticism. With Silicon Valley and the 'Magnificent Seven' taking on massive debt to build data centers at scale, it will be difficult for Amazon to deliver results that impress investors. Debt data shows that Amazon's long-term debt surged 81% to $119 billion from December 31, 2025, to March 31, 2026. Alphabet's debt load increased by 111% to $98 billion in the first half of 2026. Long considered a 'cash cow,' Alphabet's free cash flow turned negative for the first time in its history in the second quarter.
Wedbush analysts noted in a Thursday report that while Google's earnings reflect a shortage of computing power and a general willingness among leading firms to invest heavily in capacity expansion, even if Amazon raises its capital expenditure, it is not entirely negative. The report stated, "AWS is back on a growth trajectory, and Amazon continues to widen its competitive moat through the Bedrock AI platform, Alexa ecosystem, and global logistics network. The increased investment is justified, and we maintain a buy rating on Amazon."
Cloud Market Dynamics and Spending Outlook
While Google Cloud is growing faster, Amazon's AWS remains the leader in the global cloud infrastructure market, with Microsoft in second place. In 2020, Google Cloud's revenue was only 30% of AWS's, but by the first quarter of 2026, it had reached nearly 50% of AWS. Google Cloud's second-quarter revenue surged 82%, its fastest growth rate since at least 2020, compared to 63% growth in the previous quarter. AWS's first-quarter revenue grew by 28%, with FactSet surveys estimating second-quarter growth near 32%. Microsoft Azure and other cloud services saw first-quarter revenue growth of 40%, with a market consensus estimate of 39% for the second quarter.
Mahaney noted that cloud "demand remains strong," but he also acknowledged that it would be difficult for any other company to replicate Google Cloud's extremely high growth rate this quarter. Among the four hyperscale cloud providers, Meta is the only one without a mature public cloud business. The market expects Meta's full-year capital expenditure to be $138.9 billion, with the company informing investors in April that spending could reach up to $145 billion. Meta is currently planning to sell off idle computing capacity. For now, Meta still maintains positive free cash flow.
FactSet analysts predict that Microsoft's free cash flow will turn negative in the fourth quarter of this year, the first time since at least 2001. Amazon's free cash flow turned negative in the first quarter, and FactSet analysts forecast it will remain negative for the full year. The last time Amazon faced free cash flow pressure was in 2021 and 2022, when the pandemic drove a surge in e-commerce demand, leading to a doubling of its warehouse footprint.
Tiffany Wade, a portfolio manager at Columbia Global Equity Fund, holds positions in Alphabet, Amazon, and Microsoft. She stated, "These tech stocks require patience. From a medium to long-term perspective, they are likely to be the ultimate winners in the AI race." During Alphabet's earnings call, CEO Sundar Pichai said that the company's strategy of supplementing cloud business demand by purchasing computing power from external vendors, while increasing short-term costs, will yield attractive profit margins within a few years. Wade commented, "This strategy is likely correct. A company cannot afford to lose customers due to insufficient computing capacity."
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