Dear Reader,
Good morning.
Simmy Adelman here with Behind the Markets.
Yesterday I told you about Jamie Dimon's warning.
That the risks facing the global economy are bigger than most people think.
That the AI spending boom will probably pay off — but that the early winners might not be the long-term winners.
That at current valuations, you're being asked to pay as if the winners have already been decided.
Last night, two of the most important companies in the AI race reported earnings.
And Dimon's warning landed with a thud.
Tesla: Record Revenue. Collapsing Profits.
Tesla posted record revenue of $28.24 billion last night — up 26% year over year.
Record deliveries of 480,126 vehicles.
By almost every operational measure, the car business is recovering.
And yet the stock dropped nearly 16%.
That's roughly $140 billion in market cap gone in a single session.
Tesla's worst day in over a year.
Here's why.
Earnings per share came in at $0.33 — against expectations of $0.51.
A miss of roughly 38%.
Operating income collapsed 57% to $398 million.
Operating margin fell to 1.4% — down from 4.1% a year ago.
Free cash flow turned negative for the first time in two years, at minus $1.1 billion.
Capital spending more than doubled — up 142% year over year to $5.8 billion.
And Tesla said it still expects to spend more than $25 billion on CapEx this year, with even larger outlays coming in future years.
The car business is fine.
The problem is everything else.
The "Just Trust Me" Problem
Tesla is spending billions on three things that generate almost no revenue today.
Robotaxi is live in seven cities.
Optimus production lines are being installed.
The Terafab chip factory in Austin is under construction.
Each of these could be transformative.
Each of them is almost entirely future tense.
And last night the market decided that future tense at 349 times earnings isn't something it wants to keep paying for without seeing results.
One outlet put it bluntly this morning: "Elon Musk's 'just trust me' doesn't hold anymore."
That's not unfair.
Six analysts cut their price targets this morning.
Tesla is now down 30% in 2026.
Alphabet Had the Same Problem
Here's the part that should make every investor sit up.
Tesla wasn't alone last night.
Alphabet — Google's parent company — also reported earnings.
And also saw free cash flow turn negative.
Alphabet raised its 2026 capital expenditure guidance to between $195 billion and $205 billion — and warned that spending would increase further in 2027.
Alphabet's stock fell more than 6% this morning.
Two of the most important AI companies in the world.
Both burning cash.
Both spending at a pace that's outrunning their ability to generate returns.
Both telling investors: trust us, the payoff is coming.
The Pattern Dimon Warned About
Yesterday I told you what Dimon said about the internet boom.
That the companies everyone bet on in the early years — Yahoo, Netscape, AOL — weren't the ones that ultimately captured the value.
That Google didn't exist until 1998.
That Facebook didn't exist until 2004.
That the real winners showed up after the early spending boom had already burned through a generation of capital.
Last night felt like a data point in that story.
The companies spending the most aggressively on AI right now are burning cash.
Their margins are compressing.
Their free cash flow is turning negative.
And the returns on all that spending remain, for the most part, a promise.
That doesn't mean the promise is wrong.
Tesla's robotaxi and Optimus could be transformative.
Alphabet's AI infrastructure could generate enormous returns.
If anything, Alphabet is one of the handful of companies that can actually monetize their AI efforts.
But Dimon's point — and the market's reaction last night — is the same point.
The gap between spending and returns is widening.
And at these valuations, investors are running out of patience for promises.
What This Means for You
Don’t forget one of the number one rules of investing.
First, do no harm.
Protect your capital and don’t take wild shots.
The AI revolution is real.
The opportunity is real.
But right now the market is in the middle of a painful repricing — figuring out which companies can actually convert AI spending into AI earnings.
And that process is not nearly over yet.
Tesla is down massively from its peak and still trades at a valuation that assumes the robotaxi and Optimus stories pay off at enormous scale.
Alphabet is spending $200 billion a year and seeing its free cash flow turn negative.
These are not reasons to panic.
They are reasons to be selective.
To know exactly what you own and why you own it.
And to make sure you're not paying for promises that haven't been kept yet.
The companies that will win this era are the ones converting spending into earnings.
We'll be watching this market very carefully.
Have a wonderful weekend.
All the best,
Simmy Adelman, Editor-in-Chief
Behind the Markets
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Written by Simcha Adelman