Strong corporate earnings may not be what they appear
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Reports from Nvidia and Walmart last week wrapped up Q1 earnings season, and the numbers were fantastic—or appeared so at first glance.
Why it matters: Strong profits can justify the stock market's ability to continue to climb, despite the Iran war and the risks it presents.
State of play: The S&P 500 is up roughly 9% since the start of fighting in late February and is hovering near record-high levels.
By the numbers: Companies in that benchmark index produced earnings per share of $80.75 in the first quarter — up 28.4% from that quarter a year ago, according to FactSet data.
Context: That's the fastest growth rate for the market since 2021, when reopening from the pandemic enabled companies to trounce puny profits from the previous year, when the economy was still in lockdown.
Yes, but: There are growing questions about whether these numbers are being inflated — perhaps misleadingly — by the animal spirits driving the AI boom.
The fine print: The largest contributors to the surging growth in S&P profits during the quarter were Alphabet, Amazon and Meta, according to FactSet analyst John Butters.
The intrigue: These three companies also each reported unusually big contributions to their profit from sources outside their core business.
- Google parent Alphabet's profit number included a $37.7 billion windfall, mostly due to the rising value of its ownership stakes in other companies. Alphabet didn't disclose precisely what investment produced that paper gain, but the company is known to be an investor in Anthropic.
- Amazon, however, did disclose that its investment in Anthropic produced a $16.8 billion accounting windfall that contributed to its giant Q1 profit.
- Meta also reported a gain of $8 billion, thanks to a nonoperating tax benefit.
The big picture: These are not small numbers.
- Meta's tax benefit — which stemmed from a Treasury Department ruling — was about the same size as Costco's entire full-year profit in 2025.
- Alphabet's nonoperating gain was bigger than Walmart's entire net income last year.
- Amazon's Anthropic windfall eclipsed Goldman Sachs' annual profit in 2025.
Threat assessment: If AI asset values fall sharply, those paper gains could reverse just as quickly — and ripple through broader equity markets.
The bottom line: What gets written up can also be written down.
