Big Tech’s substantial investment gains from private AI companies like Anthropic and OpenAI, along with stakes in SpaceX, are significantly inflating reported corporate earnings and obscuring the true growth trajectory of the S&P 500. While recent S&P 500 earnings growth officially hit 48%, excluding these paper gains reveals a more conservative 29% increase, aligning closer to analyst expectations. Major players such as Microsoft, Amazon, and Alphabet have seen their bottom lines artificially boosted by these private valuation increases, raising questions about the underlying health of their core businesses.
Wall Street is getting a distorted view of corporate earnings as Big Tech's lucrative venture capital portfolios significantly boost reported profits. Companies like Microsoft, Amazon, and Alphabet recently recorded substantial investment gains, largely due to their stakes in highly valued private AI firms, Anthropic and OpenAI, and in some cases, SpaceX.
These AI trailblazers, Anthropic and OpenAI, have seen their private market valuations surge to nearly $1 trillion each amid the frenetic AI boom. As major shareholders, Microsoft and Amazon (with investments in OpenAI and Anthropic), and Google (with a stake in Anthropic), must account for the increased value of their holdings in quarterly income statements. However, these gains are purely on paper and do not reflect the profits generated from their core businesses, such as software sales or cloud services.
This handful of private investment gains from tech giants has had an outsized impact on overall earnings growth, according to Tajinder Dhillon, LSEG’s head of earnings and equity research. While the S&P 500 reported a robust 48% earnings growth from a year ago in the most recent quarter, excluding these investment gains from private AI companies reveals a more tempered growth rate closer to 29%. This adjusted figure is notably closer to the 24% growth analysts had originally forecast.
Gil Luria, managing director and head of technology research at D.A. Davidson, highlighted, "The headline earnings numbers were very much inflated by equity gains in OpenAI, Anthropic and SpaceX." He noted that these types of non-operating movements often normalize over time and are typically excluded from non-GAAP financial views and future forecasts.
Despite this, the inclusion of these one-time items led to a higher-than-average number of earnings upside surprises this quarter. Companies reported earnings 7% above expectations, surpassing the long-term average of 4.4% above consensus.
The impact of these investment gains is further magnified by the sheer market weight of mega-cap tech stocks, which collectively account for approximately 35% of the S&P 500’s second-quarter revenue and roughly a third of the overall large-cap index.
Breaking down individual performances, Amazon, a significant investor in OpenAI and an early backer of Anthropic, saw its earnings soar by over 240% year-over-year. Yet, without a remarkable $53.4 billion gain primarily from its Anthropic investment, its growth would have been closer to 17%.
Alphabet experienced a similar dynamic, with its bottom-line growth spiking by nearly 300%. This was largely fueled by its approximate 5% stake in Elon Musk’s rocket company, SpaceX. Excluding the gains from both SpaceX and Anthropic, Alphabet's growth would have been closer to 23%.
For Microsoft, the effect was somewhat more contained but still significant, adding about 10 percentage points to its earnings growth. This stemmed from a $3.2 billion net income gain, mainly from Anthropic, and a $480 million gain in its OpenAI stake.
This situation highlights the increasingly intertwined relationship between burgeoning AI enterprises and established Big Tech, even before these startups go public. Both Anthropic and OpenAI have confidentially filed with the SEC, with public listings expected within the next year.
Luria also warned that this earnings dynamic could lead to increased volatility, noting that such gains can reverse. For example, SpaceX’s value has reportedly dropped about 50% from its post-IPO high, which could result in a significant mark-to-market reversal for Alphabet in upcoming reports. While a successful Anthropic IPO could potentially counterbalance this, the future remains uncertain.
Conversely, Jeff Kilburg, founder and CEO of KKM Financial, argued that despite the "enormous" profits from tech giants serving as "sprinkles," the underlying earnings growth remains robust and "jaw dropping," even without factoring in private assets.
— CNBC's Robert Hum contributed reporting.
