The AI-driven boom in profits comes with some caveats
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S&P 500 earnings are growing at some of the fastest rates of the last 30 years.
Why it matters: Giant earnings growth should reassure investors that the AI boom is more than a speculative mania. It's actually producing profits!
Yes, but: A couple of features of the current AI-driven boom are skewing the numbers and are likely overstating just how profitable things are.
By the numbers: With results from about 62% of S&P 500 companies in hand, earnings per share for the index is roughly 47% higher than last year, according to FactSet data.
Context: That's impressive. The only time we typically see growth like that is in the aftermath of severe recessions.
- For instance, the S&P 500 posted 40% year-on-year earnings growth in the first and second quarters of 2010, thanks to easy comparisons with the worst of the Great Recession the previous year.
- Ditto for the year after the worst of the COVID economic collapse, when S&P 500 earnings surged almost 80% in the third quarter of 2021.
Reality check: So far, the top contributors to the S&P 500's massive quarter are hyperscalers Amazon and Alphabet, according to FactSet data.
- Amazon's second-quarter earnings grew 242%.
- Alphabet's grew by almost 300%.
Caveat: Those insane gains, however, were largely the result of large, non-operating, unrealized gains on equity stakes these companies hold in other tech companies.
- Amazon earnings were flattered by one such gain, largely related to its ownership stake in AI lab Anthropic, which it penciled in at $53.4 billion.
- Alphabet, meanwhile, reported a seismic gain of some $99 billion primarily related to its equity stake in Elon Musk's SpaceX.
State of play: Some analysts have felt the need to strip out earnings from these giants to get a better sense of the underlying trend for earnings, which — it should be said — is still strong.
What they're saying: "Excluding Alphabet and Amazon.com, the blended earnings growth rate for the S&P 500 for Q2 2026 would fall to 28.8% from 47.4%. However, this would still mark the second consecutive quarter of earnings growth above 20% and the seventh consecutive quarter of double-digit earnings growth for the index," FactSet analyst John Butters wrote.
The intrigue: There is another element to keep in mind when contemplating the profitability of the blue chips.
- The accounting conventions of the current boom in investment spending on AI data centers should automatically boost aggregate profits.
Zoom in: Most spending that companies do, say on wages for employees, is deducted from sales, as costs or expenses. The company's profit is what remains.
- But capital expenditures are treated differently.
- Capital expenditures — such as big spending on data centers — are recognized as property on the company's balance sheet. The costs of those investments are only recognized over time, in the declining value of that property.
- By contrast, the companies selling stuff to companies making big capex investments — in the case of AI, say, chipmakers — collect their money and count those sales and profits immediately.
TL;DR: In the aggregate, this dynamic can temporarily overstate how profitable the system is, because the bill for all that spending isn't being tallied up as quickly as the profits that spending is generating for vendors.
The bottom line: At first glance, this seems like a golden age of profits for corporate America. And things are pretty good.
- But it always pays to read the fine print.
