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“Alphabet” exceeds its previous profits… and capital expenditures jump to $205 billion… Why is the “seventh lag” story wrong… “The best market since 1999” by Louis Navellier
Yesterday, after the closing bell, alphabet (Google) The second quarter results were announced, and that was tremendous.
The tech giant has exceeded expectations, showing tremendous growth across its entire business:
- Total revenue: up 24% year-over-year to $119.8 billion.
- Google search revenue: 17% increase.
- Google Cloud (AI Engine): up 82%.
- Operating income: increased by 30% while operating margins expanded to 34%.
But the real problem addressed in the report was capital expenditure guidance…
Will Alphabet keep its commitment to AI infrastructure?
Yes – and then some.
Capital expenditures rose 100% year over year to $44.9 billion. It increased its already high forecast for all of 2026 from $180 billion to $190 billion, which it set in April, to $195 billion to $205 billion. And it won’t stop there…
Finance Director Anat Ashkenazi confirmed that spending in 2027 “will increase significantly.”
Now, the downside to this is that the strong capex bill resulted in negative free cash flow of -$5.85 billion for the quarter. This affects Alphabet’s stock price today. As I write on Thursday, the stock is down 7%.
As has been the pattern in recent quarters, Wall Street is panicking about this massive capital spending, fearing that returns will not justify it. But beyond that fear, there’s no way to read this as anything other than a blockbuster performance. CEO Sundar Pichai summed it up this way:
Our investments in AI are redefining what is possible in every part of our business.
Alphabet down, AI trading up
As of last night, our technology expert Luke Lango, editor, said Innovation investorHe gave us the playbook…
If Alphabet confirms and/or raises its VC guidance, it will begin to strengthen its AI infrastructure trade, which has seen a decline in recent weeks.
Sure, as I write on Thursday, even though the Nasdaq is down about 2%, Western Digital (WDC) up to 5%, marvel (MRVL) 2% higher, and Seagate (STX) 3% added. Other AI infrastructure is also outperforming.
I contacted Luke after the results and he told me:
Alphabet’s results were stunning and widely and powerfully refuted the “peak spending” fears that have affected AI trading over the past two months…
Therefore, they will spend more. Capex forecasts for 2026 were boosted nearly 5% from $190 billion to $200 billion, the second increase this year already. This is not the peak. This is an acceleration…
We just got the confirmation we needed. Those with the super scale will continue to spend. The party continues.
Bottom line: Alphabet is the first Magnificent 7/hyperscaler domino to fall this earnings season, and the numbers have been impressive — even though the stock took a hit today.
But that raises a question…
When will “Lag 7” return to be “Mag 7”?
In recent months, as Magnificent 7’s stock performance has deteriorated, the financial media has come up with an alternative name – “Late 7.”
As of late June, the Mag 7 was down about 3% on average year to date, while the S&P 500 was up about 9% over the same period.
Why?
In short: capital expenditures – the same issue that has Alphabet in the red today.
Investors have become nervous that the hundreds of billions these companies are pouring into AI data centers will not pay off quickly enough to justify the spending.
As we’ve been covering here at digestthose investment dollars have been shifted from AI spenders to AI infrastructure vendors, which has risen even as Mag 7 has been delayed.
Now, this capital expenditure is a legitimate issue for Mag 7 owners to take into consideration. But this is what the novel “Delay 7” forgot…
Mag 7’s first-quarter earnings were generally strong, and projected second-quarter earnings were equally impressive.
Here’s the set of facts:
In total, the 7 Great Companies posted higher earnings growth (year-over-year) than 493 other companies in the S&P 500 over the past few quarters.
Is this trend expected to continue in the second quarter of 2026? The answer is yes.
For Q2 2026, the estimated earnings growth rate (y/y) for the “cool 7” companies is 31.1%.
On the other hand, the blended earnings growth rate (which combines actual and estimated results) for the remaining 493 companies in the S&P 500 for the second quarter is 22.8%.
Thirty-one percent growth does not represent an image of a “backward” group. It’s a profile of a group that is still doing exactly what earned it the title of “cool” in 2023.
Meanwhile, here’s what’s mostly been left out of Lag 7 criticism…
It is a one-sided reading.
It focuses almost entirely on what hyperscalers spend through the lens of “the returns won’t justify it.”
But what if they did? What if Wall Street just needed to take a deep breath and relax?
It’s worth noting that investors have been wrong about this very question before. The creation of the cloud in the 2000s sparked the same kind of margin anxiety then — and has gone on to become one of the most enduring profit drivers in corporate history.
I dug a Wall Street Journal An article from 2014 titled “The Costly Spending War Between Google, Amazon, and Microsoft” noted that “being a tech giant isn’t cheap,” then quoted Bernstein Research analyst Carlos Kirgener:
A notable increase in Google’s capital expenditures over the past year has raised concerns among investors.
Other articles from the period highlighted investor anxiety due to massive capital spending.
Sound familiar?
How did that happen? Well, when? Amazon (Amzn) Finally, after Amazon Web Services’ financial reporting was dismantled in early 2015, Wall Street began to change its tune. Instead of just a money pit, AWS has been revealed to be a massive, highly efficient company that generates billions in high-margin software revenue
This does not guarantee that AI capital expenditures will be made in the same way. The scale of capital spending today is on a completely different level.
However, it serves as a reminder that today’s cries of “We’re spending too much” can turn into “Wow! What insight!” tomorrow.
This is what we will be tracking. But history suggests that when there is doubt, we should give Mag 7’s management teams the benefit of the doubt.
But the good news doesn’t stop with the big tech companies
Let’s go back to the FactSet quote from a moment ago.
Did you catch this?
On the other hand, the blended earnings growth rate (which combines actual and estimated results) for the remaining 493 companies in the S&P 500 for the second quarter is 22.8%.
Not only is this number strong, FactSet notes that it would represent the strongest growth recorded by “another 493 people” since the fourth quarter of 2021.
This trend is expected to expand further as the year goes by…
FactSet predicts that by the fourth quarter of 2026, the other 493 companies will actually outperform the Mag 7: 25.3% versus 22.8%.
This fits with what we’ve seen in the “Lag 7” rotation: money moving into names that fall outside the traditional Mag 7 but are riding the same AI wave.
This helps explain why legendary investor Louis Navellier, a magazine editor… Growth investorVery bullish today…
“Best market environment since 1999”
Let’s go straight to Lewis:
The second quarter was the best-performing quarter for the Nasdaq and S&P 500 in six years…
I think so It is the best market environment we have seen since 1999…
In fact, I believe that the current AI boom could end up being stronger than the Internet boom of the 1990s.
It’s important to understand that this isn’t Lewis always being a bull. His optimism is based on economic strength.
It notes that GDP grew at an annual rate of 2.1% in the first quarter. Growth slowed slightly in the second quarter, but is set to accelerate again in the second half of 2026. Lewis is calling for GDP to reach “at least a 5% annualized pace” in the third quarter.
Back to the investment myth:
Economic growth is expected to accelerate again. Building AI is still gathering momentum. More importantly, corporate profits are accelerating.
Which is why the foundation underneath this market remains solid…
A re-acceleration of the economy would reinforce what has already been a period of strong market returns.
For example. I look at Louis Growth investor portfolio, and see returns including:
- Broadcom Company (Afgo): 363%
- Technical carpenter. (CRS): 212%
- Emcor Group (He does): 249%
- Quanta Services (PWR): 421%
And if Lewis is right, these are the types of stocks that have the most room to climb as ultra-expansionists continue to spend.
If you want to help Lewis find tomorrow’s winners while continuing his “best market environment since 1999”, Click here to learn more about joining Growth investor.
But what about the AI bubble?
Let me undo all this optimism with the criticism I’ve made in recent years…
It’s expensive.
Uber pessimists put it more dramatically: “Our stock is so overvalued today that we are on the verge of a catastrophic collapse that would make the dot-com crash shameful!”
But that’s the thing about all those capital expenditures from super-expanders…
It’s growing earnings so quickly that forward-looking valuations were coming under Significantly. This requires us to re-evaluate the overall market price.
To do this, let’s use the forward P/E ratio: it compares today’s prices with expected earnings over the next 12 months.
According to FactSet, the S&P 500 has a forward P/E ratio of about 20.
Is this a scandalous assessment of a “super bubble that needs to burst”?
no.
Over the past decade, the average forward P/E has been 19.
At 20, the market is a little more expensive than usual, but it’s nowhere near a terrifying runaway bubble. By comparison, during the dot-com crash of 2000, this number exceeded 23.
In addition, this relatively high price of $20 is distorted by a few huge tech giants. If you strip those heavyweight stocks and look at the other 490-plus stocks in the S&P 500, the rest of the market is trading at a much cheaper and more normal historical average of about 16 to 17.
Yes, you may want to diversify some of your portfolio away from higher-rated technology into lower-rated sectors. But this would be more of a rebalancing rather than just a panicked “escape from the depression” reaction.
One last reason to trust…
As we just looked at, strong earnings growth is the answer to high valuations. So, how do earnings growth rates shape up as we look to the future?
Back to the set of facts:
For the second quarter, S&P 500 companies reported year-over-year earnings growth of 24.7% and year-over-year revenue growth of 12.8%.
For Q3 2026, analysts expect earnings growth of 27.0% and revenue growth of 10.8%.
For Q4 2026, analysts expect earnings growth of 24.6% and revenue growth of 10.4%.
For fiscal year 2026, analysts expect earnings growth of 24.5% and revenue growth of 10.9%.
With numbers like these, Lewis’ optimism about today’s market opportunities makes much more sense.
Back to the legendary investor:
Please – pinch yourself. You are not dreaming. The opportunity is real, folks.
It is time to grow and prosper.
Once again, to help Louis, Click here to learn more about joining Growth investor.
We will continue to track the rest of the supermeter reports as they emerge over the next couple of weeks. But so far, so good for AI trading.
I wish you a good evening,
Jeff Remsburg
