Good morning investors,

Firstly, it's a Thursday, so the latest edition of The Planning Blueprint will be released at 9am EST. This week we dive into a topic I have received many questions on - Trump accounts for your kids. Subscribe here to get it straight to your inbox - https://the-planning-blueprint.beehiiv.com/

The first real read on Big Tech's AI spending is in, and the market's response tells you everything about the mood right now. Alphabet and Tesla both beat on revenue and both reported negative free cash flow, and in after hours trading the reaction went straight to the spending rather than the beats. Alphabet slid more than 3% and Tesla around 4%. Good numbers, higher capex, and a market that no longer claps for the second part.

Wednesday's regular session was quiet ahead of it, with the S&P off 0.1%, the Nasdaq down 0.6%, and the Dow flat. This morning has turned heavier. Oil has surged again after the Houthis claimed attacks on two Saudi tankers in the Red Sea and Trump threatened to strike Iranian infrastructure, sending Brent briefly above $98 and WTI over $90, the highest since before last month's ceasefire. Futures are lower across the board. Intel reports after the close today, with T-Mobile, Union Pacific, Honeywell, and Lockheed among the names before the bell.

Google Showed the AI Spending Is Working

Alphabet delivered the quarter I was hoping to see, and it goes to the heart of the question hanging over this whole earnings season. The AI investment is producing real money. Revenue came in at $119.8 billion against $116.9 billion expected, operating income rose 30% to $40.8 billion, and margins widened by two points to 34%.

The standout was the cloud business. Google Cloud revenue jumped 82% year over year to $24.8 billion, and operating income more than tripled to $8.8 billion from $2.8 billion a year ago, with margins expanding from around 21% to 36%. That combination is what makes the quarter matter. Usually growth this fast comes with a heavy bill to win customers and add capacity. Google did the opposite, keeping more of each dollar even as the business accelerated. The AI infrastructure spending is no longer just a cost line. It is generating meaningful profit, and the enormous committed backlog of cloud work, north of $500 billion, tells you the demand behind it is real and contracted.

One note on the headline earnings. A large unrealized gain on equity investments added roughly $6 per share, so the real story is the operating performance rather than the accounting benefit. Strip that out and underlying earnings were closer to expectations, which is fine, because the point was never a one off gain. It was whether the cloud engine could grow and widen margins at the same time, and it did.

The catch, and the reason the stock traded off, is the same one running through this entire season. Capital spending reached nearly $45 billion for the quarter, and Alphabet raised its full-year capex guidance to as high as $205 billion, up from $190 billion, with a warning that 2027 goes higher still. Free cash flow swung to negative $5.9 billion, a startling number for a company that generated nearly $25 billion in the same quarter last year. Management was clear it expects free cash flow to stay under pressure while it builds. What I would say is this is that if the market frets about the cost even at Alphabet, a clear AI winner with multiple profit engines and cloud results this strong, then that anxiety is going to follow every megacap that reports. The difference is that Google just showed the spending converting to profit. Others will have to prove the same, and Meta, Microsoft, Amazon, and Apple all report next week.

Tesla's Future Keeps Getting More Expensive

Tesla was the messier of the two. Revenue beat comfortably at $28.2 billion, up 26%, but earnings missed at $0.33 against $0.51 expected, and the traditional car business is under real pressure. Gross margin sat at 16.8%, operating margin fell to just 1.4%, regulatory credit revenue dropped 67%, and free cash flow turned negative at $1.1 billion as capital spending hit a record $5.8 billion.

Meanwhile the future facing side is accelerating in every direction. Robotaxi is now running in multiple US cities, Cybercab production has started in Texas, self-driving subscriptions climbed 56% to nearly 1.5 million, AI compute more than doubled in the first half, and the company has begun turning over Model S and X lines toward Optimus manufacturing. Tesla reiterated capex above $25 billion this year, roughly triple last year, with the CFO warning the cash burn deepens from here. Musk framed it plainly on the call, saying they should spend as fast as they can without being wasteful, and that it is fine to be a little less capital efficient to get things done sooner.

That leaves Tesla exactly where it has always sat for investors. Today's financials are being weighed down by investments in tomorrow's business, and whether you are bullish or bearish comes down to a single question. Do you believe those bets on autonomy, robotics, and AI produce the returns management expects? The car business is getting less profitable while the moonshots get more expensive. For anyone who has followed Musk, spending big has always been the price of admission to winning big, and the stock will tell us over time how convinced people are. I would only caution that faith is doing a lot of heavy lifting in this one, which is why I view Tesla as its own singular story rather than as a read on anything broader.

The Spending Question Is the Season's Story

Put the two together and the theme of this earnings season is set. AI capital spending is under a microscope, and revenue beats are no longer enough to carry a stock if the cash going out the door keeps climbing. That is a shift in how the market treats these names, and it is a healthy one. For two years the buildout was rewarded on faith. Now investors want to see the return, and they are willing to sell a good quarter that does not show it clearly enough.

I read this as the market maturing rather than souring. The demand underneath is not in question. Alphabet's cloud numbers, GE Vernova raising guidance again, Super Micro's order book, TSMC's records, all of it says the same thing. The buildout is accelerating because customer demand is exceptional. What has changed is that the market now insists on seeing the spending translate into profit, and Google just showed it can. The companies that can demonstrate the same will be fine. The ones spending heavily on promise alone will get the Tesla treatment until they prove it. That is a more discerning market, and for a long-term investor it is a better one to own than a market that cheers every dollar of capex without asking what it earns.

Bonds Deserve More of Our Attention

While everyone stares at the megacaps, the more important story this week may be in the bond market. The 10-year yield has climbed from a manageable 4.37% a month ago, pushed through the 4.5% level that historically starts to pinch rate-sensitive stocks, and now sits near 4.65%, close to its high for the year. The 30-year is at 5.16%, and we are now in the longest stretch above 5% since the year before the financial crisis.

This is the risk I keep returning to, and it worries me more than anything happening in the chips. Rising yields are the market telling you it is concerned about the inflation outlook, and with oil surging on the Middle East and tariffs set to return Friday, that concern has fuel behind it. The futures market now sees two hikes this year. For most of the past month the run up in yields has been shrugged off while AI tunnel vision fed the bulls, but with a Fed meeting next week and both oil and trade accelerating at once, it becomes harder to ignore. The level I watch is 5% on the 10-year, because that is where multiples across the whole market come under pressure. We are not there, but the direction of travel is the wrong one, and higher borrowing costs are a headwind for companies and homebuyers alike. Bonds, not stocks, remain my chief concern for the second half.

The Midterm Setup Is Worth Keeping in View

With the midterms four months out, Washington is starting to get noisy, and the races will shape what the administration can actually push through. LPL made a point this week that lines up with how I have framed the year for clients. Midterm years historically deliver the weakest returns of the four year cycle, averaging around 4.6% growth with the largest drawdowns and the highest volatility. The twelve months after the midterms tell a very different story. Going back to 1954, the S&P has risen in every single post-midterm period, averaging better than 18%.

The pattern makes sense. Uncertainty peaks ahead of the vote and fades once the outcome is known, letting attention swing back to fundamentals like earnings and rates. This is exactly the shape of my own view. I expect chop and a pullback through this midterm summer, then a push higher into the far side of the election. The lesson from that history is not to predict the winners but to prepare for the volatility and be ready to lean into it when the uncertainty starts to clear. Midterm years test patience and reward discipline, which is about the best summary of my posture right now that I could ask for.

Final Thought

The season's dominant question is now clear. Can record AI spending produce real profit, and Google answered yes while Tesla answered not yet. The market rewarded neither in the moment, because good revenue with rising capex and negative free cash flow is exactly the profile investors have decided to scrutinize. That is the right instinct, and it will separate the winners from the spenders as the rest of the megacaps report next week.

My positioning holds. I stay most constructive on the physical layer of the buildout, the power and infrastructure names that keep raising guidance as the demand proves real. The Magnificent Seven keep my attention, and Alphabet's cloud results are the kind of evidence that draws me back toward a group left for dead a few weeks ago. Energy stays on as a hedge with oil back near $98 on Brent and the conflict widening into the Red Sea. And I am watching the long end of the curve more closely than anything else, because a 10-year pushing toward 5% is the real threat to this market, not a single quarter of heavy capex.

Intel after the close today, a wave of industrials and rails before the bell, and jobless claims at 8:30. Next week brings the Fed and the rest of Big Tech. If any of this has you wondering whether your portfolio fits your goals rather than the day's headlines, that is a conversation I am always glad to have.

Best regards,

Dan Sheehan [email protected]

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Market Pulse with Dan Sheehan is a personal market commentary newsletter and is independent from my employer. The content is provided for informational and educational purposes only and reflects my views as of the publication date, which may change without notice. Nothing contained herein should be construed as personalized investment, legal, tax, or financial advice, or as a recommendation to buy or sell any security. Any positions discussed represent my own views and may not be suitable for every reader's objectives, financial situation, or risk tolerance. Information is derived from publicly available sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Readers should conduct their own research and consult their own professional advisers before making financial decisions.

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