Alphabet Inc. (GOOGL.US) and Tesla, Inc. (TSLA.US) kicked off the tech earnings release season on Wednesday (22nd), with one theme swiftly coming up: AI spending is coming under intense market scrutiny.

Both companies reported negative free cash flow in the latest quarter and warned investors that capital expenditures will continue to expand. Although revenue at both companies beat expectations, it failed to prevent after-hours share declines, with Tesla diving 4% and Alphabet slipping more than 3%.

The situation may serve as a warning sign for the tech sector, especially as most other mega-cap tech companies are set to release quarterly results next week. Meta Platforms, Inc. (META.US) and Microsoft Corporation (MSFT.US) will report on Wednesday (29th), while Amazon.com, Inc. (AMZN.US) and Apple Inc. (AAPL.US) will announce earnings the following day (30th).

So far, the AI boom has largely been driven by historic infrastructure spending from a handful of companies, including major investments in model developers such as OpenAI and Anthropic. However, the recent launch of lower-cost open-source models in China, paired with growing caution among US enterprises on AI service spending, has sparked concerns over future returns on such investments.

Before earnings were released on Wednesday, Alphabet shares had already declined for a third consecutive month after surging in April, while Tesla shares were down 11% in July and had lost 17% YTD. The tech-heavy Nasdaq has retreated around 5% since hitting a record high in early June.
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