Big Tech AI stakes inflate S&P 500 earnings growth to 48%

Investment gains from Big Tech's private AI stakes inflated S&P 500 earnings growth to 48 percent, masking a 29 percent underlying pace, according to LSEG data.

"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," Gil Luria, managing director and head of technology research at D.A. Davidson, said.

Microsoft, Amazon and Alphabet booked sizable investment gains in the most recent quarter from stakes in Anthropic, OpenAI and, in one case, SpaceX. Amazon's earnings jumped more than 240 percent from a year ago, but without those gains it was closer to 17 percent. Alphabet's bottom-line growth surged nearly 300 percent; excluding SpaceX and Anthropic gains, the jump would be closer to 23 percent. Microsoft saw about 10 percentage points added to earnings growth from an Anthropic investment gain.

The dynamic matters because mega-cap tech stocks already carry an outsized weighting in the market. The Magnificent Seven accounted for about 35 percent of S&P 500 second-quarter revenue, according to LSEG. Anthropic and OpenAI have both filed confidentially with the SEC and are expected to list within the next year.

The Numbers Behind the Distortion

Amazon, a major backer of OpenAI and an early investor in Anthropic, notched a $53.4 billion gain "primarily from" its Anthropic investment in the quarter. The company committed $50 billion to OpenAI in late February. Alphabet holds a roughly 5 percent stake in Elon Musk's rocket company SpaceX. Microsoft reported a $480 million gain in its OpenAI stake and a $3.2 billion net income gain mostly from Anthropic.

Without gains from just Alphabet and Amazon's private company stakes, aggregate earnings growth would sit around 29 percent, according to Tajinder Dhillon, head of earnings and equity research at LSEG. That's much closer to the 24 percent growth analysts had forecast for the quarter. Companies this quarter reported earnings 7 percent above expectations, compared with a long-term average of 4.4 percent above consensus.

What Comes Next

Luria pointed out that the dynamic works both ways. SpaceX, for example, is down roughly 50 percent from its post-IPO high. "Based on where SpaceX is trading now, GOOGL will likely have a big reversal in their mark-to-market when they report the September quarter," he said. "A successful Anthropic IPO in September could offset that, but it is too early to tell."

Others see the underlying earnings growth as healthy even with the bump. Jeff Kilburg, founder and CEO of KKM Financial, called the "enormous" profits from tech giants "sprinkles" on top of an already strong earnings season. Even without the inclusion of private assets, Kilburg called the jump in corporate earnings "jaw dropping."

The investment gains tend to be lumped into "other income," creating a wide range of reporting practices across the tech companies. Most analysts are excluding these one-time items from their estimates, but the near-term effect has been more earnings upside surprises.

The distortion should balance out with more volatility as private AI companies approach public markets. Investors will watch for Anthropic's expected IPO in September and Alphabet's September-quarter report for potential mark-to-market reversals.

This article is for informational purposes only and does not constitute investment advice.