The AI trade this year has been centered around infrastructure plays, including chips, networking equipment, and data center providers.

Alphabet’s (GOOG, GOOGL) ballooning capital expenditures, disclosed in its Q2 earnings on Wednesday, were the latest sign of tailwinds for the AI ecosystem.

The tech giant, which already spent more than $78 billion in the first half of the year, expects the total bill in 2026 to fall between $195 billion and $205 billion, with expenses mostly coming from data centers, networking, and custom silicon.

The parent company of Google and the AI tool Gemini has increased capital expenditures over the past 12 quarters, according to Yahoo Finance’s AlphaSpace data.

“If you’re looking for derivative stock calls, the AI trade is still on,” Mark Mahaney, Evercore ISI head of internet research, told Yahoo Finance last week.

He added that AI infrastructure stocks have been on a tear, thanks to spending by hyperscalers such as Google, Amazon (AMZN), Meta (META), and Microsoft (MSFT).

“These massive companies with massive amounts of cash and lots of potential leverage are willing to spend a lot on infrastructure, more than anybody thought possible,” he said.

That has created a divergence in the AI trade as investors grow concerned about the payoff from such massive spending. On Thursday, while Alphabet and other “Magnificent Seven” stocks took the biggest hit since April 2025, shares of memory makers Micron Technology (MU), SK Hynix (SKHY), and Sandisk (SNDK) all jumped. Memory chipmakers have been raising prices due to a supply shortage.

Meanwhile, Intel (INTC) blew past Wall Street’s expectations for its latest quarter, benefiting from a boom in demand for central processing units (CPUs) as the tech industry turns toward AI agents.

The stock is up 14% year to date, benefiting from investments from the Trump administration, Nvidia (NVDA), and reports that its foundry has signed on big-name customers like Google to manufacture its custom chips.

“I’ve been calling it the makers versus the takers,” Interactive Brokers chief strategist Steve Sosnick said, referring to the beneficiaries of hyperscaler spending.

The PHLX Semiconductor Index (^SOX) has pulled back from its June record high but remains up 66% year to date and 111% over the past year, handily outperforming the S&P 500 (^GSPC), which has gained 8% and 16%, respectively.

Even within the semiconductor complex, however, some strategists caution against. blanket buy across the entire sector.

“There are two types of semis right now,” Gil Luria of D.A. Davidson told Yahoo Finance.

“There are semis where the valuation implies that the cycle’s going to go strong through 2030. That’s your AMDs (AMD), your Intels, your optical, your semicap, stuff like Cerebras (CBRS),” he said.

In comparison, the analyst pointed to “Micron and Nvidia — where their current stock prices imply the cycle’s already over. So if even if we got just one more year of investment, those stocks are very inexpensive.”

The wildcard may be what the Federal Reserve decides to do with interest rates. With oil surging to $100 per barrel, the 10-year Treasury yield jumped to its highest level since January 2025, reaching 4.7%, while the 30-year stayed above the 5% for the longest period since 2007, the year prior to the financial crisis.

Higher rates indicate higher borrowing costs, which could spell trouble for a high-growth company looking to take on debt.

More spending plans for the rest of the hyperscaler complex, like software giant Microsoft, which reports next week, could also create stock market volatility.

“The sell the news reaction … if we see more of that next week from these names, that’s going to create some more headlines as we move into the last month of the summer,” Matt Maley, managing director and equity strategist at Miller Tabak, told Yahoo Finance.

UBS strategists recommend leaning into more diversification.

“We remain constructive on AI’s growth story, and favor a diversified and balanced exposure across the AI value chain — from semiconductors and hardware to megacap tech and more defensive areas of the industry,” the strategists said on Friday.

Northwestern Mutual Wealth Management Company chief investment officer Brent Schutte told Yahoo Finance that he suggests not concentrating on any one AI theme or any theme at all, pointing out the Financial Services (XLF) sector among the beneficiaries of AI outperforming.

“Continue thinking about opportunities where there are cheaper valuations,” he said. “I think about small caps in the US and even real estate investment funds, which have done really well over the past six months.”

Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on X at @ines_ferre.

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