Alphabet's earnings and the capex fear
Alphabet's latest quarter beat hard: $911 earnings per share and $119.8 billion in revenue. The stock fell anyway, and heavy capital spending on AI worried Wall Street. That worry looks misplaced. Google's earnings quadrupled over the last 12 months. If quadrupling profit doesn't prove the AI and capex spending pays off on the way out, nothing does. The bigger reason the stock dropped that day was oil above $90, with Brent crude near $100 a barrel, which put the whole market on edge. Investors should not confuse a stock's weak day driven by the market with the actual numbers, which were strong.
At 21 times earnings, with earnings up fourfold in a year and momentum still building, Google sits in a sweet spot. Its planned capex of $195 to $205 billion is justified. It came in a bit higher than expected, which is exactly what investors needed to see. Micron and other suppliers had been falling on fear that the big cloud buyers (hyperscalers) would spend less. Google answered that it will spend more this year than planned, likely running into 2027.
The validation cycle
The same fear hit early in the second quarter. Investors worried, then earnings came out and validated the spending, and AI stocks ran for the rest of the quarter. The same pattern should repeat this quarter. Microsoft and Amazon report next week and should add to it. Investors nervous about holding infrastructure stocks should set that worry aside. Markets climb walls of worry, and this is a classic case.
Where the value sits
If the hyperscalers keep raising AI spending, the best-positioned winners are the hardware names that have lagged over recent months:
- Nvidia - the godfather of AI, since you can't build any of this without it, trading at 18 times earnings. High on the list.
- ASML - makes the lithography machines that let these chips be built. A case for investing outside the US.
- Micron - down 20% from its high; the AI buildout needs a lot of memory chips.
- Taiwan Semiconductor - part of the same group.
These stocks have gone down or moved sideways for six weeks, which created real value. On Micron, the pattern this year has been several drawdowns, each followed by a bounce, so recent dips looked like buying chances, and some investors have been climbing that wall of worry.
Tesla: great company, weak stock
Tesla was a mixed bag and missed earnings badly. A great company doesn't always make a great stock. The ideas behind Tesla make it exciting, but holding it takes patience I don't have. Over the last five years it has underperformed almost everything despite strong themes. Depending on how you measure it, the stock trades near 200 times earnings, and there is far better value elsewhere.
The one bright spot ties back to the AI trade: Tesla said it is spending more on AI capex than expected and plans to keep doing so, which helps the AI infrastructure stocks. That still isn't a reason to own Tesla itself. Talk of Tesla being folded into SpaceX is another open question that confuses investors. When investors are confused, they sit on their hands and don't buy. With a bull market running in so many other things, Tesla may not draw much attention.
Market outlook and the risks
Can the bull market survive rising geopolitical conflict pushing oil higher? That's the $64 billion question, and it turns on whether the Strait of Hormuz stays open and whether the Middle East finds peace. Both matter to the forecast that the S&P 500 reaches 8,100 by year-end, which sits at the high end of Wall Street. That target is plausible because the AI trade and the strong earnings from Google should be repeated across the sector, and the market is broadening out. The average US stock trades at 17 times earnings, leaving plenty of room to move higher. The real risks are a Middle East flare-up or the midterms derailing things between now and then. At these reasonable prices, that's a risk worth taking.
The Fed
The tension is whether to shift into bonds given current valuations. On the Fed's next meeting, a rate cut isn't the base case; a small hike higher would be a surprise but is possible, roughly 50/50. Powell is a man of few words, concerned, and leans hawkish, and oil is climbing right into the meeting, so he might take the shot. Strong economies, especially AI-led ones, tend to push rates up. The same happened during the internet cycle, because high demand creates more inflation than wanted. Rates get nudged up either at this meeting or by year-end, and there is at least one increase coming. Some people don't like hearing that.
