Nikkei 225 falls 2.7% as Alphabet's AI spending rattles markets

Japan's Nikkei 225 suffered its worst session in months as Alphabet's AI spending plans reignited doubts about when the technology boom will generate cash returns.

The Nikkei 225 fell 2.69% to 64,634.04 on Friday after Alphabet raised its 2026 AI infrastructure spending target to as much as $205 billion, burning through cash faster than investors expected.

"The risk is tilted towards further increases, particularly while Microsoft and others remain capacity-constrained," said Charu Chanana, chief investment strategist at Saxo Markets. "But investors will increasingly focus on how much of that cash must be reinvested simply to remain competitive — and whether AI revenue can grow faster than capital expenditure, depreciation and operating costs."

The broader Topix lost 1.28% to 4,002.09, tracking a selloff in U.S. tech stocks after Alphabet reported its first-ever negative free cash flow. The Google parent burned through $5.9 billion in the second quarter as property and equipment spending hit $45 billion, a 25% increase from the first quarter. Alphabet shares plunged 6% in after-hours trading, while Amazon and Oracle each fell more than 4%, Meta slid 3% and Microsoft declined 2%.

The five largest hyperscalers are expected to spend more than $700 billion on capital expenditures this year, with the majority directed at AI-enabling infrastructure such as chips, servers and networking equipment. Alphabet alone has announced an $85 billion equity issuance and seen its long-term debt more than double to $98 billion in the first half of the year, raising questions about how much further balance sheets can stretch before returns materialize.

Cloud Growth Fails to Offset Spending Fears

Google Cloud revenue surged 82% to $24.8 billion, and its backlog expanded to $514 billion — evidence, some analysts said, that the spending is generating demand. JPMorgan analysts called the pullback a buying opportunity, reiterating their overweight rating and $420 price target. "We continue to believe Google is showing returns on AI spending," they wrote. Mizuho analysts said the positive surprise from cloud revenue and earnings more than offset modest negatives, adding they would be buyers on the pullback.

But the market focused on the cost side. Alphabet's capex-to-revenue ratio is expected to hit 41% this fiscal year, up from 23%, according to Reuters data. Meta's ratio is forecast to reach 54.9%, while Microsoft's is seen at 45%. The spending has been so aggressive that Alphabet executives said they plan to rent data center capacity from third parties to keep adding customers, a move that will pressure margins.

The Nikkei's decline tracked a broader reassessment of AI-exposed stocks globally. Traders pointed to three catalysts: Alphabet's elevated capex guidance, the first negative free cash flow in the company's history, and the growing reliance on debt and equity markets to fund infrastructure builds. Bernstein analyst Mark Schmulik said Alphabet "is a tough stock to own" as investors question the strength of its finances and the competitiveness of its frontier AI models.

The selloff in Tokyo was broad-based, with technology and semiconductor-related names bearing the brunt of the selling. The decline extended a stretch of volatility for Japanese equities, which have been sensitive to shifts in the global AI investment narrative given the country's heavy exposure to chip-making equipment and materials suppliers.

This article is for informational purposes only and does not constitute investment advice.