Alphabet blows past earnings… capex jumps to $205 billion… why the “Lag 7” story is wrong… Louis Navellier’s “best market since 1999”
Yesterday, after the closing bell, Alphabet (GOOG) reported its second-quarter results, and it was a whopper.
The tech giant blew past expectations, showing massive growth across its entire business:
- Total revenue: up 24% year-over-year to $119.8 billion.
- Google search revenue: up 17%.
- Google Cloud (the AI engine): rocketed 82%.
- Operating income: up 30% while operating margins expanded to 34%.
But the real issue going into the report was its capex guidance…
Would Alphabet maintain its commitments to AI infrastructure?
Yes – and then some.
Its capex increased 100% year over year to $44.9 billion. And it increased its already elevated full-year 2026 outlook of $180 billion to $190 billion, established in April, to $195 billion to $205 billion. And it won’t stop there…
CFO Anat Ashkenazi reiterated that 2027 spending will “significantly increase.”
Now, the downside of this is that the aggressive capex bill resulted in a negative free cash flow of -$5.85 billion for the quarter. This is weighing on 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 colossal capex spend, fearing the returns won’t 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 AI investments are redefining what’s possible across every part of our business.
Alphabet down, AI trade up
Going into last night, our technology expert Luke Lango, editor of , gave us the playbook…
If Alphabet confirmed and/or raised its capex guidance, it would begin to firm up the AI infrastructure trade, which has taken a bath in recent weeks.
Sure enough, as I write on Thursday, though the Nasdaq is down about 2%, Western Digital (WDC) is up 5%, Marvell (MRVL) is 2% higher, and Seagate (STX) has added 3%. Other AI infrastructure darlings are also outperforming.
I reached out to Luke after the results, and he told me:
Alphabet’s results were stunning and a broad, strong rebuttal of “peak spending” fears which have weighed on the AI trade for the last two months…
So, they’re going to spend more. The 2026 capex forecast was boosted ~5% from $190B to $200B, its second hike this year already. That’s not a peak. That’s an acceleration…
We just got the confirmation we needed. The hyperscalers are going to keep spending. The party rolls on.
Bottom line: Alphabet is the first Magnificent 7/hyperscaler domino to fall this earnings season, and the numbers were fantastic – despite the stock taking a beating today.
But that prompts a question…
When will the “Lag 7” return to being the “Mag 7”?
In recent months, as the performance of the Magnificent 7 stocks has underwhelmed, the financial media has come up with an alternative name – the “Lag 7.”
Through late June, the Mag 7 were down about 3% on average year-to-date, while the S&P 500 was up nearly 9% over the same stretch.
Why?
In a word: capex – the same issue that has Alphabet deep in the red today.
Investors have grown nervous that the hundreds of billions these companies are pouring into AI data centers won’t pay off fast enough to justify the spend.
As we’ve been covering here in the Digest, those investment dollars have been rotating out of the AI spenders and into the AI infrastructure suppliers, which have soared even as the Mag 7 lagged.
Now, this capex spend is a legitimate issue for Mag 7 owners to consider. But here’s what the “Lag 7” narrative has forgotten…
The Mag 7’s Q1 earnings were generally quite strong, and projected Q2 earnings are equally impressive.
Here’s FactSet:
In aggregate, the “Magnificent 7” companies have reported higher (year-over-year) earnings growth than the other 493 companies in the S&P 500 over the past several quarters.
Is this trend expected to continue in Q2 2026? The answer is yes.
For Q2 2026, the estimated (year-over-year) earnings growth rate for the “Magnificent 7” companies is 31.1%.
On the other hand, the blended (combines actual and estimated results) earnings growth rate for the remaining 493 companies in the S&P 500 for the second quarter is 22.8%.
Thirty-one percent growth isn’t the profile of a group that’s “lagging.” It’s the profile of a group still doing exactly what earned it the “Magnificent” label in 2023.
Meanwhile, here’s what’s been mostly left out of the “Lag 7” critique…
It’s a one-sided read.
It focuses almost entirely on what the hyperscalers are spending through the lens of “the returns won’t justify it.”
But what if they do? What if Wall Street just needs to take a deep breath and relax?
It’s worth remembering that investors have been wrong about this exact question before. The cloud buildout of the 2010s drew the same kind of margin anxiety at the time – and it went on to become one of the more durable profit engines in corporate history.
I dug up a Wall Street Journal article from 2014 titled “Google, Amazon and Microsoft’s Costly Spending War” that noted “being a tech giant ain’t cheap,” and then quoted Bernstein Research analyst Carlos Kirjner:
Google’s remarkable capex increase over the last year has raised concerns among investors.
Other articles from that period highlighted the anxious handwringing of investors due to the massive capex spend.
Sound familiar?
And how’d that turn out? Well, when Amazon (AMZN) finally unbundled Amazon Web Services’ financial reporting in early 2015, Wall Street began to change its tune. Rather than a money pit, AWS was revealed to be a massive, highly efficient business generating billions in high-margin software revenue
This doesn’t guarantee AI capex plays out the same way. The scope of the capex spending today is on a completely different level.
Still, it’s a reminder that cries of “We’re spending too much” today could turn into “Wow! What foresight and vision!” tomorrow.
This is what we’ll be tracking. But history suggests that, when in doubt, we should give these Mag 7 management teams the benefit of the doubt.
But the good news doesn’t stop with Big Tech
Let’s circle back to the FactSet quote from a moment ago.
Did you catch this?
On the other hand, the blended (combines actual and estimated results) earnings growth rate for the remaining 493 companies in the S&P 500 for the second quarter is 22.8%.
That figure isn’t just solid – FactSet notes it would mark the strongest growth the “other 493” have posted since Q4 2021.
And the trend is expected to broaden even further as the year goes on…
FactSet projects that by Q4 2026, the other 493 companies will actually outgrow the Mag 7: 25.3% versus 22.8%.
That fits with what we’ve been seeing in the “Lag 7” rotation: money moving into names that sit outside the traditional Mag 7 but are riding the same AI wave.
This helps explain why legendary investor Louis Navellier, editor of , is so bullish today…
The “best market environment since 1999”
Let’s go straight to Louis:
The second quarter was the best-performing quarter for the NASDAQ and S&P 500 in six years…
I believe this …
In fact, I believe the current AI boom could ultimately be even more powerful than the internet boom of the 1990s.
It’s important to understand that this isn’t Louis being a perma-bull. His optimism is anchored in economic strength.
He notes that GDP grew at a 2.1% annual pace in the first quarter. Growth cooled a bit in the second quarter, but it is set to reaccelerate in the second half of 2026. And Louis is calling for GDP to hit “at least a 5% annual pace” in Q3.
Back to the investment legend:
Economic growth is poised to reaccelerate. The AI buildout is still gathering momentum. And most importantly, corporate profits are accelerating.
That is why the foundation beneath this market remains solid…
An economic reacceleration would goose what’s already been a period of strong returns for the market.
For example. I’m looking at Louis’ Growth Investor portfolio, seeing returns including:
- Broadcom, Inc. (AVGO): 363%
- Carpenter Tech. (CRS): 212%
- EMCOR Group (EME): 249%
- Quanta Services (PWR): 421%
And if Louis is right, these are the kinds of stocks that have more room to climb as the hyperscalers continue spending.
If you’d like Louis’ help in finding tomorrow’s triple-digit winners as this “best market environment since 1999” continues, .
But what about the AI bubble?
Let me push back on all this optimism with a critique I’ve made in recent years…
It’s expensive.
Uber bears put it more dramatically: “We’re so overvalued today that we’re on the verge of a catastrophic crash that will put the dot-com crash to shame!”
But here’s the thing about all that capex from the hyperscalers…
It’s growing earnings so quickly that forward-looking valuations have been coming down significantly. This requires us to reassess the market’s overall price tag.
To do this, let’s use the forward P/E ratio: it compares today’s prices to forecasted earnings over the next 12 months.
According to FactSet, the S&P 500 has a forward P/E ratio of about 20.
Is this an egregious “super bubble that must pop” valuation?
No.
Over the last decade, the average forward P/E has been 19.
At 20, the market is slightly more expensive than usual, but nowhere near a runaway, terrifying bubble. For comparison, during the Dot-Com crash of 2000, this number pushed past 23.
Plus, this relatively high price tag of 20 is distorted by just a few massive tech giants. If you strip away those top heavyweights and look at the other 490+ stocks in the S&P 500, the rest of the market is trading at a much cheaper, more normal historical average of around 16 to 17.
Yes, you might want to diversify some of your portfolio away from higher-valuation tech into lower-valuation sectors. But that would be more of a rebalancing rather than a panicked “escape the bust” reaction.
One final reason for confidence…
As we’ve just looked at, robust earnings growth is the solution to high valuations. So, how are earnings growth rates shaping up as we look ahead?
Back to FactSet:
For the second quarter, S&P 500 companies are reporting year-over-year growth in earnings of 24.7% and year-over-year growth in revenues of 12.8%.
For Q3 2026, analysts are projecting earnings growth of 27.0% and revenue growth of 10.8%.
For Q4 2026, analysts are projecting earnings growth of 24.6% and revenue growth of 10.4%.
For CY 2026, analysts are projecting earnings growth of 24.5% and revenue growth of 10.9%.
With numbers like this, Louis’ optimism about today’s market opportunities makes far more sense.
Back to the legendary investor:
Please – pinch yourself. You are not dreaming. .
It is time to grow and prosper.
Again, for Louis’ help, .
We’ll keep tracking the rest of the hyperscalers reports as they roll in over the next two weeks. But so far, so good for the AI trade.
Have a good evening,
Jeff Remsburg
