Earnings Storm Brewing: What's Priced In for Google, Nvidia, and the AI Sector?

Alphabet delivered a textbook beat, but the market's reaction was textbook sell-the-news. The company posted fourth-quarter earnings that topped both top- and bottom-line estimates, with revenue hitting $113.83 billion against a whisper number of $111.43 billion. The standout was Google Cloud, which saw revenue surge 47% year over year to $17.66 billion, crushing expectations. On paper, it was a blockbuster quarter.

Yet the stock fell. The reason was a massive, unexpected guidance reset. Alphabet announced it will roughly double its capital expenditure in 2026, projecting a spend of $175 billion to $185 billion. That figure, nearly double its 2025 outlay, was a shock to the market. The expectation gap yawned wide: investors had priced in strong results, but not this level of spending commitment.

This is the classic "beat and raise" dynamic turned upside down. The beat was real, but the raise in spending expectations spooked investors. The hike signals a multi-year, capital-intensive sprint to build AI infrastructure, a move that will pressure near-term profits. As one analyst noted, costs for AI projects like DeepMind and Waymo will weigh on overall Alphabet profitability in 2026. The market's sell-off reflects a reset in expectations, trading today's strong earnings for tomorrow's heavier cash burn.

AI Spending: A Signal of Confidence or a Cost Trap?

The capex surge is a direct signal of management's confidence in AI's growth trajectory. CEO Sundar Pichai framed the decision as "seizing the moment" to capture AI's growth, calling it a "defining moment". This isn't a cautious step; it's a massive, immediate bet on securing a sustainable competitive advantage. The scale is staggering, with Alphabet projecting spending between $175 billion and $185 billion in 2026-nearly double its 2025 outlay and surpassing even Meta's aggressive plans.

Yet the market's reaction reveals deep uncertainty about the wisdom of this move. Analysts are split. While some, like Barclays, argue the spending is justified by "astonishing" cloud growth and DeepMind progress, others see a trap. Deutsche Bank noted the tech sector is in a "current state of flux" and questioned whether doubling down on capital now is a good or bad thing. The core tension is between building a moat and burning cash. Costs for AI projects like DeepMind and Waymo "weigh on overall Alphabet profitability" in 2026, a direct hit to the bottom line that investors had not fully priced in.

This spending spree connects to a broader market trend of fear. Software stocks are being sold amid concerns that AI tools could replace traditional products. Alphabet's own bet on AI infrastructure is a hedge against that disruption. But it also makes the company a prime target for the same skepticism, as investors question whether the massive upfront investment will translate into durable, profitable growth or simply a costly race to keep up. The expectation gap here is clear: the market sees a huge, immediate cost, but the payoff is still in the future and uncertain.

The Forward Look: What's Priced In for Nvidia and the Sector

Nvidia's setup is a classic expectation arbitrage play. The company has forecast fourth-quarter revenue of $65 billion, well above the average analyst estimate of $61.66 billion. That beat is already baked into the stock. More importantly, management expects an adjusted gross margin of 75%, slightly ahead of the market's 74.5% expectation. This supports its premium valuation and signals pricing power remains intact.

The key risk is that the stock trades at a forward P/E of 47.3. That multiple leaves almost no room for error. It prices in near-perfect execution, with demand from cloud providers scaling even as concerns about an AI bubble grow. The expectation gap here is about sustainability. While Nvidia's $500 billion in bookings through 2026 is a massive signal of future demand, the real test is whether that translates into smooth, high-margin revenue growth without physical bottlenecks in power and data center space.

The market is looking past the immediate beat. The focus is on the guidance for the next quarter, where Wall Street expects revenue of $70.7 billion. Any miss on that trajectory, or any hint that the massive capex build-out by customers like Microsoft and Alphabet is hitting a wall, could trigger a sharp re-rating. For now, the whisper number is for another blowout. The market is pricing in that outcome, but the high multiple means the reality must be flawless.

Catalysts and Risks: The Market's Next Move

The setup now hinges on a few key catalysts and a clear primary risk. The first major test is Nvidia's earnings report on February 25. The market has already priced in a strong beat, but the real focus will be on guidance. Investors need confirmation that AI demand remains robust and that the company's projected launch of a new chip architecture this year will continue to outpace supply. Any hint of a slowdown or a capex plan that suggests the industry's spending spree is cooling could trigger a sharp re-rating.

A broader market shift is also a critical signal. Watch if the historic "Great Rotation" out of mega-caps continues. In January, small-caps dramatically outperformed, with the Russell 2000 surging while the S&P 500 lagged. This rotation signals a potential re-rating away from high-valuation AI spenders like Alphabet and Nvidia toward domestically-focused companies trading at a discount. If this trend persists, it would validate fears that the current rally is narrow and vulnerable to a shift in sentiment.

The primary risk to the current thesis is that Alphabet's massive AI spending does not translate into proportionate revenue growth. The company projects capital expenditure of $175 billion to $185 billion for 2026, nearly double its 2025 outlay. This is a huge bet on future returns. The market is currently pricing in a successful outcome, but the reality is that costs for AI projects like DeepMind and Waymo weigh on overall Alphabet profitability in 2026. If the revenue from Google Cloud and other AI services fails to accelerate at a similar pace, margins will compress. That would invalidate the current "buy the rumor" thesis, turning a massive capex hike into a costly overreach. The expectation gap would then flip from one of optimism to one of regret.