Why Google's $205B AI Spending Plan Sparked Wall Street Turmoil

Google’s bigger-than-expected spike in spending on data centers and other AI infrastructure is rattling Wall Street.

While it was the first of the Big Tech giants to report second-quarter earnings, and its competitors' stock prices also dropped Thursday, analysts say the market plunge may not be a reflection of the larger sector's data center spending spree. It may instead be an indication that Google is falling behind in the artificial intelligence arms race. 

Google-parent Alphabet broadly exceeded investor expectations with its second-quarter earnings performance. Its cloud segment revenue grew 82% year-over-year to $24.8B, while top-line revenue grew 24%.

Yet it was the tech giant’s skyrocketing AI infrastructure spending that grabbed Wall Street’s attention and sent the firm’s share price plummeting.

Google raised its estimated capital expenditures for 2026 to as much as $205B, a significant jump from the $180B to $190B predicted just three months ago. The escalating spending — the vast majority of it for data centers and the computing equipment inside them — is expected to continue into next year.

Chief Financial Officer Anat Ashkenazi said on its earnings call that capex will “increase significantly” again in 2027.

The ramped-up infrastructure spending means that, despite record revenue, Google is now spending more money than it generates. The company’s leadership acknowledged Wednesday that this negative free cash flow is likely to continue for the foreseeable future. 

Alphabet’s shares plunged immediately in after-hours trading following its Wednesday afternoon earnings report and were down more than 7% Thursday. 

While stock volatility following an earnings report isn't unusual, some analysts say the sell-off may be more than just passing turbulence. Investors were still getting comfortable with Google’s previous infrastructure spending projections, and now the company has raised the bar yet again. 

“[I]t feels like the road could be a bit bumpier in the near term as industry competition and capital ramp to once unimaginable heights,” MoffettNathanson analyst Michael Nathanson wrote in a note to investors Thursday.

Google’s leadership defended the planned spending on its call with analysts Wednesday, arguing that the company is investing to meet existing demand, not making speculative bets. Ashkenazi said Google’s computing capacity continues to trail customer demand, pointing to the firm’s cloud backlog, which grew by roughly $50B between the first and second quarters, as evidence that the company is still playing catch-up. 

And despite the capex surge pushing Google into negative cash flow, executives expressed confidence that the spending will deliver a return on investment. These are the “very, very early” days of AI, said CEO Sundar Pichai, and spending more to secure cloud customers today — even if it means operating at a loss — will more than pay for itself as the AI economy expands. 

“Over the past year, we've gotten more bullish on the opportunities ahead,” Pichai said. “If anything, the dynamics look healthier than where we were about a year ago, and so that's what gives us the confidence to undertake those investments.”

Wall Street’s reaction to Alphabet's earnings report may reflect anxiety around AI infrastructure across the tech sector as a whole, spending that is now approaching $2T. The Google sell-off seems to have spooked the market, with all of the “magnificent seven” stocks — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — sliding Thursday morning to lose a combined $888.2B in market value by midday. 

However, analysts say the real concerns around Google aren't simply that it is spending more. The fact that the company seems to be getting less for its AI buck than its competitors is what's raising red flags. 

Despite the strong financial performance of its cloud business, Google has struggled to make breakthroughs with its foundational AI models in recent months, encountering technical problems and falling behind other model developers both in the quality of its AI models and the quantity of new models it releases. 

“Google perhaps doesn't make maybe quite as much noise as some of the other leading labs or perhaps have quite the frequency,” JPMorgan Chase’s Douglas Anmuth said on Wednesday's earnings call. 

Google’s AI business has faced a slew of negative headlines in recent months. Its Gemini 3 model, released less than a year ago, is widely considered inferior to products from competitors like Anthropic and OpenAI. Last week, the company delayed the launch of Gemini 3.5 Pro due to the model not meeting internal performance benchmarks. 

With Google’s largest competitors set to report earnings in the coming week, Wall Street should soon provide a clearer read on investor sentiment toward escalating AI capex. For now, analysts specializing in the sector say Google’s cratering share price may reflect a sense that Google is scrambling to play catch-up in an AI arms race in which it is falling significantly behind. 

“Investors appear to be focusing on the sharp rise in capital expenditure, alongside a weaker margin outlook, while continued delays to Gemini 3.5 Pro and a lack of standout product releases have raised questions about whether Alphabet’s AI investments are yet translating into a clear competitive advantage,” Ben Barringer, head of technology research at Quilter Cheviot, said in an interview with CNBC Thursday.