Google Takes the AI Lead, But This 'Shocking' Divergence Is a Big Concern

Investors are digesting earnings reports Thursday morning from four of the Magnificent Seven names. Alphabet (GOOGL) was the standout report with the biggest beats, and what was most interesting was the comment that its growth was restrained by a lack of compute. Cloud demand is now running ahead of the company's ability to develop capacity but revenue and EPS estimates are ramping higher.

Amazon (AMZN) , Microsoft (MSFT) , and Meta Platforms (META) all beat to varying degrees, but expectations were high going in, and they are trading in negative territory early in the day.

Microsoft put a $190 billion 2026 capex number on the call, well above the $154.6 billion consensus and up roughly 61% over 2025. Meta raised full-year capex guidance to $125 billion-$145 billion, from $115 billion-$135 billion, and disclosed a sequential decline in users. JPMorgan JPM cut Meta to neutral from overweight, and there are reports of additional downgrades coming. Alphabet has at least a dozen price target increases so far and is clearly the new leader in the AI group.

The biggest takeaway from these reports is that we are still early in the buildout of AI infrastructure. Three of the four hyperscalers increased AI spending forecasts. Before the reports, expectations were that capex would rise about 64%. After the reports, the increase is closer to 80%. Combined 2026 commitments from the four reporters now run close to $725 billion.

What that means is that chips, data centers, and other infrastructure providers to the hyperscalers will continue to be market leaders. These sectors have been frothy lately, but valuations will continue to improve as the numbers move higher.

Watch for stronger rotational action within the AI sector. We already have a big move into Google taking place as money rotates out of Meta and to a lesser extent out of Microsoft and Amazon.

Apple Reports Thursday Night

Apple (AAPL) reports after the close tonight. Consensus is for EPS of around $1.94 on roughly $109.7 billion in revenue. The stock has been a relative laggard year to date, and guidance on iPhone, Services, and the China business will set the tone.

Apple is far less leveraged to AI than the other Mag 7 names but will still be important as an indicator of overall economic health.

The Other Side of the Tape

While the market's attention has been focused on the Mag 7, there are a couple of other troubling issues developing.

The first is the rise in oil prices. Brent crude is up nearly 7% in early Thursday trading and is above $120, with WTI around $110. These are the highest levels since the Iran situation began, and the worry now is how long a blockade may last.

The Wall Street Journal reported that President Trump told aides to prepare for an extended blockade. Axios reported that the U.S. has rejected Iran's proposal to reopen the Strait of Hormuz, and that CENTCOM has plans for a short, sharp wave of strikes in reserve. The situation is dragging out longer than hoped, and that is raising concerns about inflationary pressures.

Meanwhile, bonds are acting poorly and are barely holding above recent lows. The 10-year Treasury yield closed at 4.41% on Wednesday after the Fed's 8 to 4 decision to do nothing. That is the largest FOMC dissent since 1992 and indicates that the incoming Fed Chair, Kevin Warsh, may have a difficult task ahead of him. Rising yields combined with rising oil is the worst possible challenge for monetary policy.

These worries are being reflected in poor market breadth. The divergence between the indexes and breadth was record-setting on Wednesday, with just 27% of stocks advancing while the Nasdaq 100 (QQQ) closed up 0.6%.

According to Jason Goepfert, on Monday the S&P 500 closed at a record high. The next day, at least 1% more stocks hit a 52-week low than a 52-week high. In more than 70 years of market history, that has happened only one other time. That is a shocking level of divergence and suggests we are on the brink of some chaotic market action.

My Game Plan

The indexes are likely to struggle from here as they digest the earnings news, but there should be strong rotational action underneath. The AI infrastructure winners will continue to attract interest, and investors will likely look for plays outside technology that are good values and do not have extended charts.

Look for the Mag 7, with the exception of Google, to churn. The group lagged after earnings last quarter and is not likely to be chased after this quarter. I'll be looking to add to my Google position.

At the time of publication, Rev Shark was long GOOGL.