Take Off Your AI-Tinted Goggles to See Perils and Opportunities Like This
As earnings reveals a less-than-pretty picture in the market, I’m eyeing some carefully selected stocks outside the tech trade.
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We are getting into the heart of Q2 earnings reporting season. Quarterly results to this point have exceeded expectations by a larger margin than a typical quarter to this point. Well, at least the headline numbers and for investors that look primarily at revenue and adjusted earnings growth.
Those of us investors who are more focused on free cash flow are not nearly as impressed. The AI Revolution has distorted so much of the market that it is almost comical. Alphabet (GOOG) reported its quarterly numbers after the bell on Wednesday. The company delivered a top- and bottom-line beat even as ‘adjusted’ earnings came in slightly below the consensus. The stock was off 7% in trading on Thursday. Alphabet boosted its full year capital expenditure guidance by some $15 billion. It looks like the hyperscaler will spend some $200 billion this year at the midpoint of that updated guidance. This resulted in negative free cash flow of $5.9 billion in Q2. Of note, this is the first quarter Alphabet has delivered negative free cash flow since the company went public just over two decades ago.
Tesla, Inc. (TSLA) also delivered its quarterly report after the bell on Wednesday. The company beat on revenue growth but soaring capital expenditures helped trigger a miss on the bottom line. The company had negative free cash flow ($1.1 billion) for the first time in two years. Tesla expects free cash flow to be negative for the year as capex nearly triples to at least $25 billion as the company invests more on initiatives like AI driven robotics. Management also said that it has boosted its borrowing capacity to $30 billion. The stock fell over 14% in trading Thursday.
This year is heading to be a record for equity issuance. Both Alphabet and Space Exploration Technologies Corp. (SPCX) have raised approximately $85 billion recently and the latter also executed a $25 billion bond deal. Balance sheet leverage seems to be increasing at a concerning pace throughout the AI ecosystem. And this doesn’t include the over $1.6 trillion in off balance sheet liabilities for the major hyperscalers. Goldman was out this week stating that just under $500 billion in AI-related debt has been raised this year. This dwarfs the just over $320 billion of this type of debt issuance for all of 2025.
Meanwhile, increasing capex for all things AI is acting like a black hole for rest of corporate tech budgets. The stock of International Business Machines Corporation (IBM) got crushed last week as its quarterly results missed expectations as its customers are increasing delaying projects and purchases to free up money for their AI efforts. This week, Pegasystems Inc. (PEGA) followed the same path as IBM the week before.
Too many investors are viewing the market with AI goggles as they run up stock margin debt to a record $1.5 trillion. A classic sign of market tops historically. Meanwhile, I continue to initiate covered-call holdings on stocks in a lot of “old economy” stocks. I highlighted two energy names I have recently picked up that are backdoor AI plays in my column on Wednesday.
Thursday, I initiated a new starter position in Weyerhaeuser Company (WY). The shares were just upgraded to a ‘Strong Buy’ this week at Raymond James. The company faces headwinds from a housing market that continues to be moribund. However, on a longer-term basis its vast timber acreage appears undervalued. The stock also pays a just over 3.5% dividend yield that pays one to wait until the fortunes of the company improve.
At the time of publication, Jensen was long WY.
