Shares of Alphabet and Tesla fell in premarket trading on Thursday after both companies signaled a fresh acceleration in artificial intelligence-related spending, bolstering investor concerns that the race to dominate AI will require years of elevated capital investment before generating commensurate financial returns.

Alphabet shares fell about 4% before the opening bell. In comparison, Tesla dropped more than 5%, as investors focused less on quarterly operating performance and more on rapidly expanding capital expenditure plans and negative free cash flow.

The reaction underscores a broader shift in market sentiment. For much of the past two years, investors rewarded technology companies for aggressively investing in AI infrastructure. Increasingly, however, markets are scrutinizing whether those investments will translate into sustainable earnings growth, particularly as spending commitments continue to rise.

Alphabet Raises AI Investment Plans

Google parent Alphabet increased its 2026 capital expenditure forecast to between $195 billion and $205 billion, up from its previous projection of $180 billion to $190 billion, while warning that spending would rise further in 2027. The increase points to the company’s race to expand AI computing infrastructure, including data centers, custom AI chips and networking equipment needed to support growing demand for Gemini models, AI-powered search and enterprise cloud services.

Chief Executive Sundar Pichai said the higher spending was driven primarily by the need to rapidly expand computing capacity.

“The increase is primarily due to an acceleration in the delivery of capacity to meet growing demand,” he said.

Google has repeatedly stated that customer demand for AI services exceeds the computing capacity currently available, making infrastructure expansion a necessity rather than an optional investment.

The company’s comments also suggest that supply constraints, rather than demand, remain one of the biggest limitations on AI revenue growth.

Tesla Ramps Up Spending On Robotics And AI

Tesla also outlined a much larger investment program as it shifts beyond electric vehicles toward artificial intelligence, autonomous driving and humanoid robotics. Second-quarter capital expenditure surged 142% year over year to $5.79 billion, while the company said it expects to spend more than $25 billion this year.

Chief Executive Elon Musk sought to reassure investors that the spending would generate substantial long-term returns.

“This is a massive capex year. I’m confident that all the things that we’re investing in will yield incredible returns. Really, maybe the best capex returns that we’ve ever seen,” Musk said during the earnings call.

Tesla said much of the investment is being directed toward expanding semiconductor production capabilities and preparing manufacturing lines for Optimus, the company’s humanoid robot. The company said it is installing first-generation production lines for Optimus and expects manufacturing to begin soon, underscoring Musk’s ambition to transform Tesla from primarily an automotive manufacturer into an AI and robotics company.

Cash Flow Concerns Take Center Stage

One of the biggest concerns for investors was that both companies reported negative free cash flow during the second quarter. Free cash flow is closely watched because it measures how much cash remains after capital investments and is often viewed as a key indicator of financial flexibility.

Negative free cash flow is not unusual during periods of heavy investment. However, it signals that companies are consuming cash today in anticipation of future growth, increasing pressure to demonstrate that AI investments eventually generate higher revenue and profit.

The results reinforce a growing divide within the technology sector between companies benefiting from AI demand immediately, such as chipmakers and infrastructure providers, and firms still investing heavily to build the platforms expected to monetize AI over the longer term.

Despite the market reaction, both companies reported encouraging operational results.

Alphabet’s cloud business continued to benefit from enterprise AI adoption, with Google Cloud revenue rising 82% year over year to $24.8 billion, exceeding analysts’ expectations. The strong performance indicates that AI services are becoming a meaningful driver of cloud growth as businesses increasingly deploy generative AI applications.

Tesla also delivered solid growth in its core automotive operations.

Revenue from the automotive business increased 23% year over year to $20.52 billion, demonstrating continued demand for the company’s vehicles even as management broadens its strategic focus toward AI-powered technologies.

The market reaction highlights how investor priorities are evolving. Earlier in the AI boom, announcements of higher spending were often viewed positively because they signaled technological leadership. Now, with the largest technology companies collectively committing hundreds of billions of dollars to AI infrastructure, investors are demanding evidence that those investments will generate attractive returns within a reasonable timeframe.

The response to Alphabet and Tesla’s results also reflects broader concerns that AI development is becoming significantly more capital intensive, requiring sustained investment in data centers, advanced semiconductors, networking infrastructure and energy capacity.

As competition among the world’s largest technology companies intensifies, the focus is shifting from who can spend the most on AI to who can convert that spending into durable earnings growth and shareholder returns.

The U.S. dollar remained resilient on Thursday, hovering near multi-month highs against major currencies as escalating conflict in the Middle East drove oil prices higher, boosted U.S. Treasury yields and prompted investors to scale back expectations for Federal Reserve interest rate cuts.

The greenback edged slightly lower against the euro ahead of the European Central Bank’s policy decision but climbed to its strongest level against the Japanese yen since 1986, underscoring widening policy and economic divergences among the world’s largest economies.

Markets remain focused on the fallout from the U.S.-Israeli war on Iran, which has severely disrupted shipping through the Strait of Hormuz while attacks by Yemen’s Houthi movement in the Red Sea have heightened fears of a broader energy supply shock. The twin threats to two of the world’s most important oil transit routes have sent crude prices sharply higher, amplifying inflation concerns and reshaping expectations for monetary policy across global markets.

The U.S. dollar index, which measures the currency against a basket of six major peers including the euro and yen, slipped marginally by 0.08% to 101.06. However, the modest decline masked continued strength in the dollar, which has benefited from its traditional safe-haven status and the relative resilience of the U.S. economy to higher energy prices.

Unlike Europe and Japan, which rely heavily on imported energy, the United States has become one of the world’s largest oil and natural gas producers. That has reduced its vulnerability to external energy shocks and strengthened the dollar whenever geopolitical tensions push oil prices higher.

The latest surge in crude prices has also complicated the outlook for interest rates. Investors increasingly believe the Federal Reserve will have less room to ease monetary policy if higher energy costs feed into broader inflation, helping support U.S. Treasury yields and the dollar.

Attention on Thursday also centered on the European Central Bank, which is widely expected to leave interest rates unchanged while maintaining a tightening bias amid renewed inflation risks stemming from the Middle East conflict.

Markets have already priced in two ECB rate increases by early 2027, leaving investors focused on whether policymakers will signal an even more hawkish stance.

“We cannot fully discount the tail risk of an early 25 bps hike (today),” said Michiel Tukker, senior strategist at ING.

“The question is whether markets would interpret this as a hawkish policy turn or whether the move would be perceived as front-loading September’s move.”

The euro traded 0.09% higher at $1.1423 ahead of the policy announcement.

Yen Still Under Pressure

The Japanese yen remained under the greatest pressure among major currencies, falling to its weakest level against the dollar since December 1986. The currency was last trading at 163.30 per dollar, extending a prolonged decline that has become a growing concern for Japanese policymakers.

While many analysts have attributed the yen’s weakness to the Bank of Japan’s cautious pace of monetary tightening, others argue that Japan’s deteriorating economic outlook is playing an equally important role.

“The consensus view blames a timid BOJ (for the recent yen fall), but I think the problem is that higher oil prices have dashed hopes of 1.5% GDP growth this year,” said Kit Juckes, strategist at Societe Generale, noting that the yen has become the weakest-performing currency in the G10 group.

Japan imports nearly all of its crude oil, making the economy particularly vulnerable to sustained increases in global energy prices. A weaker yen further amplifies those costs by making dollar-denominated imports even more expensive, increasing inflationary pressure while squeezing consumers and businesses.

Ironically, expectations for additional Bank of Japan tightening have continued to grow. Japan’s two-year government bond yield climbed to a 31-year high on Thursday as investors increased bets that the central bank could accelerate the pace of future interest rate increases to contain inflation and stabilize the currency.

Nevertheless, the widening interest rate gap between Japan and the United States continues to favor the dollar, encouraging investors to borrow cheaply in yen and invest in higher-yielding dollar assets, a strategy that has weighed heavily on the Japanese currency.

Japanese authorities have stepped up efforts to curb speculative selling of the yen.

Finance Minister Katsunobu Kato reiterated on Thursday that the government stands ready to take decisive action in the foreign exchange market if necessary. Tokyo previously intervened directly in April and May after the yen weakened beyond the psychologically important 160-per-dollar threshold.

However, many analysts believe currency intervention alone may offer only temporary relief unless accompanied by broader policy measures.

Mallika Sachdeva, head of forex thematics at Deutsche Bank Research, said a key variable would be whether Japan’s Government Pension Investment Fund (GPIF), the world’s largest pension fund, is encouraged to increase domestic investments.

“If the Government Pension Investment Fund (GPIF) is mandated to bring money back into domestic assets, this could be very bullish for the yen,” she said.

“However, if the BOJ is coopted to support bonds through renewed JGB purchases, this could be very negative.”

Japan’s finance ministry has recently indicated it wants the country’s vast public pension funds to substantially increase investments in domestic assets, a move that could reduce capital outflows and provide structural support for the yen.

Investors are also closely monitoring Japan’s fiscal trajectory, which many strategists believe will become increasingly important in determining the currency’s long-term direction.

Treasury Continues to Scale Amid Oil Surge

Meanwhile, U.S. Treasury yields continued to climb as investors adjusted to the prospect of higher inflation and fewer Federal Reserve rate cuts.

The benchmark 10-year Treasury yield rose above 4.67%, while the policy-sensitive two-year yield climbed to 4.317%. The 30-year Treasury bond yield also moved above 5.16%, reflecting investor demands for higher compensation amid rising inflation expectations and growing government borrowing needs.

Bond yields and prices move inversely, and rising yields generally support the dollar by making U.S. assets more attractive to global investors.

Energy markets remained the principal driver of global financial sentiment.

Brent crude futures surged $3.80, or 4%, to $97.87 a barrel, reaching their highest level in more than a month and extending gains for a fifth consecutive session.

The rally reflects mounting fears that disruptions in the Middle East could significantly reduce global oil supplies.

Iran’s Revolutionary Guards said an oil tanker caught fire following an explosion while attempting to navigate a mined route near the Strait of Hormuz off Oman’s coast. Two additional tankers reportedly turned back.

The Guards also declared that the Strait of Hormuz remains under Iranian control and “completely closed” while U.S. military operations continue in the region, warning that no tanker would be permitted to transit the waterway without Tehran’s authorization.

The Strait of Hormuz is the world’s most important oil chokepoint, handling roughly one-fifth of global oil consumption. Any prolonged disruption could trigger severe supply shortages and sharp increases in energy prices worldwide.

Adding to market anxiety, Yemen’s Iran-backed Houthi movement has intensified attacks in the Bab el-Mandeb Strait, another critical maritime corridor connecting the Red Sea with the Gulf of Aden.

The Houthis said on Thursday they struck two Saudi oil tankers as part of what they described as a naval blockade targeting Saudi Arabia.

According to Goldman Sachs, nearly 9 million barrels of oil per day have passed through the Bab el-Mandeb Strait over the past month, including approximately 4 million barrels daily that would be difficult to reroute if multiple regional chokepoints remain blocked.

“The immediate outlook for crude oil remains supportive as markets price a worrying probability of supply interruptions in a second chokepoint,” said Pepperstone research strategist Ahmad Assiri.

The conflict continued to escalate militarily.

The U.S. military said it had completed a 12th consecutive night of strikes against Iranian targets, hours after President Donald Trump warned that the United States would destroy an Iranian bridge or power plant each time Iran attacks vessels transiting the Strait of Hormuz.

Goldman Sachs expects oil prices to retain most of their recent gains through July and August, citing declining global inventories, reduced Middle Eastern production, strong seasonal summer fuel demand and a slowdown in releases from strategic petroleum reserves.