Skip NavigationMarketsBusinessInvestingTechPoliticsVideoWatchlistInvesting Club
PRO
LivestreamMenuGoogle parent company Alphabet boosted its forecast for capital spending for both 2026 and 2027 last week, citing supply constraints amid surging demand for more computing power. Shares tumbled Thursday following the announcement that the company’s 2026 capex would increase its potential maximum to $205 billion from $190 billion . GOOGL 5D mountain Class A shares of Alphabet in the past five trading days While allocations for more investment mean larger debt service costs and potentially less money to return to shareholders in the short term, the alternative could be far worse. A substantial capex cut from any of the big cloud computing companies would tank the market, investors said. “The market would go straight down,” Steve Eisman, an investor famous for shorting the 2008 housing bubble, told CNBC Monday. “If the hyperscalers cut … the market would go straight down on that news.” JPMorgan traders issued a similar warning on Friday. “If we see a capex cut, or to a lesser degree buyback reduction, that will roil the markets pushing us toward a bearish view,” they wrote in a note to clients. The JPMorgan traders described themselves as “tactically bullish” but see diminished hyperscaler capex as a “datapoint that could flip us to a more bearish stance.” A spending pullback would be worse than a reduction in short-term returns because it could indicate that wider demand for computing capacity is leveling off and that predictions may have overshot their marks. “I worry about the indication that if their capex slows, then that’s a sign that demand is waning a bit,” Paul Meeks, head of technology research at Freedom Capital Markets, told CNBC. Wall Street is expecting about $260 billion in capex from Google in 2027, Meeks said. “I think people would be satisfied [with that],” he added. “The thing I worry about is if you have a drop in spending: All of a sudden it’s $205 billion for Google this year, and next year it’s, say, $100 billion – it collapses.” The ratchet up in the spending forecast from Google follows an $80 billion equity raise from the company in June that took many investors by surprise. That move amounted to a “very modest” 2% stock dilution , according to an analysis from Wells Fargo, and it forced Wall Street to revise its math on expected returns from both Google and the cloud computing sector as a whole. “The event likely compels investors to re-underwrite the capacity ROI thesis at Google and perhaps more broadly across the hyperscalers,” Ken Gawrelski at Wells Fargo wrote last month. An alternative, positive scenario for stocks could come to pass if companies taper their capex over the next year in line with expectations, as opposed to giving it a drastic defensive cut. Since bears are already likely pricing in that drastic reduction, its failure to materialize would represent a major vote of confidence. “If that happens, I think that would be a positive sign and maybe stocks would go up,” Meeks said.Read More
About The Author
