S&P 500 Q2 Earnings Surge 52%, Boosted by Big Tech's AI Investment Gains

S&P 500 companies are concluding a banner second-quarter earnings season, with aggregate profits on track for a 52% year-over-year surge, according to LSEG data. This remarkable growth was significantly influenced by massive unrealized gains on artificial intelligence investments held by technology giants.

A Closer Look at the Gains

The headline growth figure includes substantial mark-to-market boosts from Alphabet and Amazon on their stakes in AI firms like Anthropic. Excluding these non-operating gains, S&P 500 second-quarter profit growth would be a more modest, yet still robust, 33%, as reported by LSEG. This still marks the strongest quarter for earnings growth since 2021.

Key contributions to the headline number include:

• Alphabet: An unrealized gain of $77.1 billion on its equity securities.
• Amazon: Non-operating pre-tax income of $53.4 billion, primarily from its investments in Anthropic.

According to analysis from Goldman Sachs strategists, AI infrastructure stocks were responsible for approximately one-third of the S&P 500's earnings per share growth for the quarter.

Investor Scrutiny on AI-Driven Profits

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While optimism around AI has fueled market gains, some investors view these mark-to-market profits with caution because they reflect market volatility and can be reversed in future quarters. "Mark-to-market gains can turn into losses just as fast," Savita Subramanian, an equity and quant strategist at BofA Securities, wrote in a recent client note, adding that increased dependence on such uncontrollable factors "reduces visibility."

This caution extends to broader concerns about high valuations and complex financing deals within the AI sector. "We’re probably stealing from the future here," said Michael O’Rourke, chief market strategist at JonesTrading. "So as much as we’re shooting to the upside in earnings, that sets us up for disappointments next year or the following year... Investors need to be cognizant of that."

Widespread Strength Beyond Tech

Despite the outsized impact of AI-related gains, the second-quarter earnings season has been strong across the board. Data from LSEG shows that seven of the 11 major S&P 500 sectors have posted at least double-digit year-over-year earnings growth, with the energy sector leading with an estimated 143% increase.

With results in from over 450 companies, 85% have surpassed analyst earnings expectations. This positive momentum is carrying over into forecasts for the next period, as analysts have raised their S&P 500 third-quarter profit growth projections to 29.2%, up from 27.6% at the start of July.