Warning that AI capital expenditure is “out of control”! Experts give investment guidelines: Alphabet is an exception due to “multiple leverage”, and funds are rotated to healthcare “safe havens”

The Zhitong Finance App learned that when tech giants are investing unprecedented capital in AI infrastructure, Sarat Sethi, managing partner of the established US independent asset management company DCLA, issued a clear warning: this “money burning race” is getting out of control, and it may be difficult for most participants to prove its rationality to investors. In an interview on Monday, Sethi said he is increasingly concerned about tech companies' huge AI capital spending plans, particularly companies other than Alphabet (GOOGL.US). At the same time, he pointed to two key trends that are reshaping the market landscape: hardware spending is “eating up” software budgets, and capital is flowing back from overvalued tech stocks to defensive sectors with steady cash flow, such as healthcare.

Alphabet has “many manipulable tools”, and other investors in the field of artificial intelligence do not

Alphabet's “exceptionalism”: building a buffer for multiple business lines

Sethi admits that although he is cautious about AI spending across the tech industry, Alphabet remains a core holding in his portfolio. “When I looked at Alphabet... they had many different adjustable levers (levers to toggle),” Sethi said. He pointed out that Alphabet's diverse business lines — including YouTube, cloud services, and Gemini — enable it to flexibly adjust expenses when the return on AI investment falls short of expectations. This “multi-lever switchable” flexibility is Alphabet's key advantage that distinguishes it from other large AI spenders.

This view was confirmed in Alphabet's second-quarter earnings report. The company's revenue increased 24% year over year to 119.8 billion US dollars, and Google Cloud's revenue surged 82% to 24.8 billion US dollars. However, the market did not cheer for this report card — Alphabet's stock price fell after the earnings report and continued to fall after the market, the core reason was the astonishing surge in capital spending. The company's capital expenditure doubled year-on-year to 44.9 billion US dollars in the second quarter, and free cash flow fell to negative 5.9 billion US dollars, the first negative in decades. The company also raised its annual capital expenditure guidance to US$1950 billion to US$205 billion, and it is expected that expenditure will continue to increase significantly in 2027.

Hardware “eats lunch”: Brutal restructuring of corporate IT budgets

Sethi pointed out that one of the key themes emerging in recent earnings reports is the significant differentiation between hardware and software spending. Customers are scaling down hardware purchases while continuing to invest more in software and security. He confirmed this trend by using IBM (IBM.US) and SAP (SAP.US) reviews as examples.

The IBM case is particularly shocking. On July 17, IBM's stock price plummeted 25%, the biggest one-day decline since the 1960s. The company revealed that customers are shifting their budgets from software and general IT to locking in the procurement of hardware such as servers, storage devices, and memory. Morningstar analysts say bluntly that hardware is “eating everyone's lunch.” Analyst Susquehanna pointed out that the increase in the share of hardware allocation in the technology budget of enterprises is having a clear “crowding out effect” on spending in other technology fields.

In this differentiation, the performance of software stocks became the most direct footnote. Salesforce (CRM.US) led the Dow Jones Index, up nearly 5%; ServiceNow (NOW.US) shares rose 9% after meeting expectations and strong execution. The market is rewarding companies that can grow without relying on expensive hardware infrastructure.

Microsoft's “urgent moment”: AI rewards must be realized faster

Sethi specifically pointed out that in this environment, Microsoft (MSFT.US) has received particular attention. The software giant's stock price has declined by double digits since the beginning of the year, and it attaches great importance to R&D investment. “They are one of the few companies that must show a faster return on investment than others,” he said.

Sethi believes Microsoft may need to prove the return on AI investments as soon as possible than other companies. Investors may become more impatient if the payout cycle takes longer than expected. Microsoft will announce financial results for the fourth quarter of the 2026 fiscal year on July 29. The market expects revenue of about US$87.7 billion, an increase of 15% over the previous year; the adjusted earnings per share are about 4.21 to 4.24 US dollars. Analysts generally expect capital expenditure to exceed 40 billion US dollars in a single quarter this quarter, driving the capital expenditure for the 2026 calendar year to about 190 billion US dollars.

Microsoft's stock price has fallen by about 20% during the year, and its performance is at the bottom of the seven tech giants. The core concerns of the market focus on two points: first, whether the capital expenditure of 190 billion US dollars means “no investment”; second, whether the AI assistant Copilot can actually deliver commercial value.

The market is anxious to see huge investments return in the form of sustainable profits and cash flow. Morgan Stanley expects Azure growth to reach an inflection point in the second half of the year, and management has clearly indicated that growth will accelerate moderately in the second half of the year.

Healthcare: the “historically lowest” value depression in the S&P 500

In addition to the technology sector, Sethi also emphasized the return of capital to high-quality, cash-generating companies in the healthcare industry. Sethi highlighted the trend of capital flowing back to high-quality, cash-generating companies in the healthcare industry. He pointed out that companies like Stryker (SYK.US), Thermo Fisher (TMO.US), and Johnson & Johnson (JNJ.US) are all targets with strong balance sheets and good real profit growth.

The current weight of the healthcare sector in the S&P 500 index has dropped to only 8.3%, the lowest point since 1994. This percentage has declined by about 50% since 2022. Historically, when the healthcare sector hit a similar low weight in 2011, the sector outperformed the market by more than 70 percentage points over the next four years.

According to LSeg/Lipper data, in the week up to the beginning of July, about 1.47 billion US dollars had flowed into the healthcare sector. When the Nasdaq Composite Index recently fell below the key moving average, health care, daily consumption, etc. bucked the trend, and the S&P 500 performed clearly better than the market capitalization-weighted index.

The healthcare sector's weight in the S&P 500 has dropped to an all-time low, providing an opportunity for investors seeking stability and quality rather than momentum. Capital flow data confirms this trend: over the past month, healthcare ETFs (XLVs) attracted around $800 million in capital inflows. Healthcare, energy, and financial ETFs performed the best during the same period, rising 7.4%, 6.3%, and 4.5%, respectively. Meanwhile, technology ETFs (XLK) experienced capital outflows of 8.7 billion US dollars in the past month, the highest among all sectors of the S&P 500 index.