Alphabet's earnings, due later today, have turned into a test of whether the recent rally in big tech can keep going. Investors are weighing a renewed Magnificent Seven bull trade against a sharp sell-off in semiconductor stocks, and the reaction to Alphabet may decide which side gets the next move.
That is why Evercore ISI strategist Julian Emanuel said on Wednesday that hyperscaler forward free cash flow is likely to turn negative this quarter. In his view, the market is looking for proof that AI spending can still support both groups at once, not just one trade at the expense of the other.
Emanuel said Alphabet's report takes on added significance because Korea's KOSPI has helped set the tone for a buy-the-dip move into semis. He also said an earnings beat and strong capex intentions could lift both the Magnificent Seven and semiconductor stocks together, with the possibility of fresh highs in the S&P 500. His base case is yes, but he said the time for conjecture is over.
The stakes are high because semiconductors have been under heavy pressure even after years of extraordinary growth and soaring valuations. Investors have been using the sector as a source of funds to buy back into the Magnificent Seven, while worries about export restrictions, tariffs and geopolitical tension continue to hang over chip sales to key international markets. Amazon and Meta are still investing aggressively in AI capital expenditures, so the question is not whether spending exists, but whether the market will keep rewarding it.
That debate has become sharper after some on the Street compared the low-cost Kimi K3 model released by Moonshot AI with the DeepSeek model release circa early 2025, a reminder that cheaper AI alternatives can quickly change the story. If Alphabet's stock reacts well, the market may read that as a sign it can still justify higher 2026 capex guidance. If it gets hit on fears of AI spending cuts, the opposite message would land just as fast.
For now, the answer rests on a single report and the market's response to it. The next move in Google earnings could tell investors whether the AI spending boom is still broad enough to hold up both the Magnificent Seven and semis, or whether one of those trades has already started to crack.
