The headline earnings numbers for several of the largest technology companies this quarter look far stronger than the underlying businesses actually performed. The reason: paper gains on private AI investments.
According to CNBC, Microsoft, Amazon, and Alphabet all booked sizable investment gains in the most recent quarter from stakes in Anthropic, OpenAI, and in at least one case, SpaceX. Both Anthropic and OpenAI are now valued just south of $1 trillion in private markets. Because these companies are private, the tech giants that hold stakes in them are required to account for increases in value on their quarterly income statements, even though no actual sale occurred.
The result has been a significant distortion of overall S&P 500 earnings growth. Earnings growth for the index in the most recent quarter is running around 48% from a year ago, according to Tajinder Dhillon, head of earnings and equity research at LSEG. But strip out the investment gains from just Alphabet and Amazon, and that figure drops to around 29%. That is far closer to what analysts had been forecasting. The consensus estimate heading into the quarter was 24% growth.
"The headline earnings numbers were very much inflated by equity gains in OpenAI, Anthropic and SpaceX," Gil Luria, managing director and head of technology research at D.A. Davidson, told CNBC. "Having said that, these types of moves tend to even out over time, which is why we typically exclude them from a non-GAAP view and from forecasts."
Amazon provides the most striking example. The company committed $50 billion to OpenAI in late February and was also an early investor in Anthropic. In the second quarter, Amazon reported a $53.4 billion gain described as coming "primarily from" its investment in Anthropic. Its total earnings jumped more than 240% from a year ago. Without those investment gains, the increase was closer to 17%.
Alphabet saw a similar effect, driven largely by its stake in SpaceX.
These gains are typically reported under a category called "other income," and the way companies report them varies widely. Most analysts are already excluding these one-time items from their estimates. But in the near term, the gains pushed more companies to beat expectations. Companies this quarter reported earnings 7% above forecasts on average, compared with a long-term average of 4.4% above consensus, according to LSEG.
The distortion matters more because of the sheer weight these companies carry in the broader market. The so-called Magnificent Seven tech stocks accounted for roughly 35% of all S&P 500 revenue in the second quarter, and have represented about a third of the overall large-cap index over the past year or so. When gains at that scale flow through income statements, they move the aggregate numbers in ways that can mislead investors trying to assess the health of corporate America.
Dhillon noted that adjusting for these private company stakes changes the earnings picture considerably, and analysts will likely continue watching how valuations at Anthropic and OpenAI shift in coming quarters.
