AI Market Faces Key Test Ahead of Google (GOOGL.US) Earnings! Cloud Business Growth and Capital Expenditure Guidance in Focus

According to Zhitong Finance APP, as investment in artificial intelligence (AI) has surged dramatically, investors are looking forward to the upcoming Google (GOOGL.US) earnings report to show strong growth in its cloud computing business, which would demonstrate that the company's large-scale investments in AI are yielding clear returns. As one of the world's largest "hyperscale cloud service providers" investing in AI infrastructure, Google's performance and its capital expenditure guidance are also considered a key barometer for observing global AI transaction trends.

Currently, the market generally expects Google's Q2 revenue to reach $116.98 billion, up 21% year-on-year, and earnings per share of $2.91, a 26% increase year-on-year. In this high-profile financial report, the most closely watched metric might be the growth of Google’s cloud business. With the growth rate of this segment accelerating in recent years, it is crucial to demonstrate that this trend continues, especially since Google has hinted that this earnings report will include information about further increased spending plans. The market expects Google’s cloud business sales to grow nearly 65% year-on-year to $22.4 billion in the second quarter, compared to a year-on-year growth rate of 63% in the first quarter.

Cloud business revenue is increasingly important to Google

Mark Mahaney, an analyst at Evercore ISI, said in a July 19 report that this forecast is "very reasonable, and there is substantial upside, as industry feedback shows that demand for AI infrastructure remains extremely strong."

While the cloud business is expected to continue performing strongly, the market will undoubtedly also consider Google’s capital expenditure plans in this earnings report. In its Q1 results, Google stated that the company expects capital expenditures to reach as high as $190 billion this year, and capital investment in 2027 will be “significantly” higher than this year.

Google recently completed an $85 billion equity financing round, which expanded further shortly after it was announced in early June, prompting Wall Street to anticipate that the company’s future capital spending could be even higher. Based on market forecasts, Google’s capital expenditures are expected to reach $262 billion in 2027, nearly three times the level of 2025.

Google’s capital expenditures soar as the AI race heats up

Google is often considered one of the companies most capable of investing in AI. Jonathan Kosvsky, a portfolio manager at Janus Henderson Investors and a Google shareholder, said: "Google has already demonstrated that it can generate good returns from its investments. But the question is whether the company can continue to deliver such returns." He added: "If Google can show that cloud business growth is accelerating while its search business remains strong, it would reassure investors about the rationality of the company’s spending and the overall return prospects of its stock."

David Miller, Chief Investment Officer at Catalyst Funds, also a Google shareholder, said: "These capital expenditures are enormous, but currently investors still believe that as long as the data prove these investments will eventually pay off, such spending is justified." "If Google can exceed the previous quarter's cloud business growth level, it would show that the company’s investments remain fairly prudent."

In addition to the cloud business, Google’s search business has also continued to perform strongly. The company has already launched several AI tools that have received positive market feedback. Wall Street remains optimistic about its semiconductor business. On Monday, Google's share price was boosted by a report that the company is developing a server chip specifically designed to optimize its Gemini AI model. Gemini is regarded as one of the leading AI models in the industry, although the latest version’s release has reportedly been delayed as the company seeks to further improve its capabilities, especially in code programming.

As investors grow increasingly concerned about whether the massive sums spent by large tech companies to build AI capabilities will achieve meaningful returns, market sentiment is shifting. Chip manufacturers, as major beneficiaries of this spending spree, have seen their share prices soar, while the so-called "Magnificent Seven" US stocks with heavy capital outlays have barely moved. After a cumulative increase of about 66% in 2025, Google’s share price has risen only modestly in 2026, gaining just 11%, and it has dropped 14% since hitting an all-time high in May.

Among the "Magnificent Seven," only Apple (AAPL.US), which has avoided the AI spending race, and the semiconductor giant Nvidia (NVDA.US) have outperformed Google this year. Meanwhile, Google has outperformed other AI-heavy investors in the "Magnificent Seven"—Amazon (AMZN.US) is up 7.3% since 2026, Meta Platforms (META.US) is down 2.5%; Microsoft (MSFT.US) is down 18%, making it one of the biggest drags on the S&P 500’s tech sector this year.

In addition, Google’s current stock price corresponds to an expected price-to-earnings ratio of about 23 times for the next 12 months, slightly above the 10-year average of 21 times. By comparison, the S&P 500 Index currently trades at roughly 20 times forward earnings, while the tech-heavy Nasdaq 100 Index is about 23 times.

Although Google's stock valuation is the highest among major AI investment companies, the market does not think it is overly expensive, especially considering the company's potential for future growth. Miller commented: "Based on our expected margins and the growth rate we’re seeing, this multiple is very reasonable. I think many investors won’t mind paying such a valuation for this kind of high-margin, high-growth revenue. The value logic is actually very clear."

Therefore, if Google's upcoming Q2 earnings report satisfies investors and sufficiently demonstrates that its high computational power investment can continue translating into incremental revenue for advertising and cloud services, it may dispel doubts about the multi-billion-dollar AI investment returns and open up room for valuation appreciation. However, if the report signals a cut in capital expenditures or that AI returns are below expectations, especially amid growing market concerns about overinvestment in AI, the entire AI industry chain’s valuations may come under pressure.