Big Tech companies such as Microsoft, Amazon, and Alphabet saw their corporate earnings significantly boosted in the most recent quarter due to sizable investment gains from their stakes in private AI companies. For example, the S&P 500's earnings growth was reported at over 48% year-over-year, but when these investment gains from private AI companies are excluded, the growth rate drops to approximately 29%. This highlights how venture capital portfolios are making corporate profits appear stronger than their underlying business growth. These gains are largely on paper and do not reflect profits generated from selling software or other services.
Amazon, in particular, saw a more than 240% jump in earnings from a year ago. However, without these investment gains, its growth was closer to 17%. The company recorded a $53.4 billion gain primarily from its investment in Anthropic. Similarly, Alphabet's bottom-line growth surged nearly 300%, but this was largely due to a gain from its stake in SpaceX and Anthropic; without these, its growth would have been closer to 23%. Microsoft's impact was more muted but still saw about 10 percentage points added to its earnings growth, primarily from a $3.2 billion gain from Anthropic and a $480 million gain from OpenAI.
Across the Magnificent Seven tech giants, which collectively reported $315.6 billion in second-quarter net income, about $134.6 billion (42%) came from investment gains after adjusting for taxes. This compares to only about 5% in the previous quarter. These gains are largely unrealized and exist only on paper until the stakes are sold. Analysts like Gil Luria of D.A. Davidson note that while these gains inflate headline earnings, they are often excluded from non-GAAP views and forecasts because they tend to even out over time. However, this dynamic creates more earnings upside surprises in the short term, with companies reporting earnings 7% above expectations, compared to a long-term average of 4.4%.
The reliance on these investment gains for a significant portion of reported profits raises concerns about the true health and sustainability of the earnings growth, as a decline in the value of these private holdings could reverse the accounting and drag down future profits. For instance, SpaceX shares are down roughly 50% from their high, which could impact Alphabet's future mark-to-market valuations. This situation underscores the deep intertwining of AI companies with Big Tech, even before these AI companies potentially go public, with Anthropic and OpenAI both having confidentially filed for IPOs and seeking high valuations.
