S&P 500 Earnings Are Surging More Than 50%. AI Is Making the Numbers Look Even Bigger.

S&P 500 companies are closing out one of their strongest earnings seasons in years, but a closer look at the numbers shows that part of the extraordinary growth is coming from soaring valuations of artificial intelligence companies held as investments by some of America's biggest technology firms.

Aggregate second-quarter earnings for the S&P 500 are on pace to jump 52% from a year earlier, according to LSEG data cited by Reuters. Technology is leading the surge, with the sector's profits climbing an estimated 74%.

When enormous mark-to-market investment gains recorded by Alphabet and Amazon are removed, however, the picture changes significantly. Without those gains, S&P 500 earnings growth would be about 33%, according to Tajinder Dhillon, head of earnings research at LSEG. That would still make the second quarter the strongest since 2021, but it highlights just how much the AI investment boom is influencing corporate America's bottom line.

Amazon reported $53.4 billion in non-operating pre-tax other income during the second quarter, primarily tied to its investments in AI startup Anthropic, Dhillon said. Alphabet, meanwhile, recorded a $77.1 billion unrealized gain on equity securities.

The accounting gains are significant because companies can recognize increases in the value of certain investments even if they have not sold those stakes and realized the profits in cash.

That can make earnings look spectacular when valuations are rising, but it also introduces another source of volatility if the market turns. "Mark-to-market gains can turn into losses just as fast," Savita Subramanian, equity and quantitative strategist at BofA Securities, wrote in a recent client note.

Subramanian said the bank was not arguing that such gains were inherently negative, but cautioned that greater dependence on factors largely outside a company's control can make future earnings more difficult to predict.

The influence of AI extends beyond Alphabet and Amazon's investment portfolios. Goldman Sachs strategists estimated this month that AI infrastructure stocks accounted for roughly one-third of the S&P 500's earnings-per-share growth during the second quarter.

That dependence comes as Wall Street is becoming increasingly sensitive to the enormous amounts of money flowing into AI infrastructure. Nvidia, now the world's most valuable company, said Monday that it would provide a guarantee of as much as $105 billion to help OpenAI lease a massive data center in Ohio.

Nvidia shares initially climbed following the announcement before falling Tuesday as technology stocks sold off amid renewed concerns about the cost of the AI buildout and pressure in the U.S. bond market.

Michael O'Rourke, chief market strategist at JonesTrading, warned that hyperscalers are increasingly relying on borrowing and stock issuance to finance expansion. "We're probably stealing from the future here," O'Rourke told Reuters, warning that today's extraordinary earnings growth could create difficult comparisons and greater potential for disappointment in coming years.

The AI effect has already appeared in more than one quarter. S&P 500 earnings increased 29.4% during the first quarter when the Alphabet and Amazon investment gains were included, compared with 22.3% without them, according to Dhillon.

Still, the current earnings boom is much broader than two technology giants. Seven of the S&P 500's 11 major sectors are recording double-digit year-over-year earnings growth. Energy is currently leading the pack with estimated growth of about 143%, according to LSEG.

Corporate results are also beating expectations at an unusually strong pace. With more than 450 S&P 500 companies having reported as of Friday, approximately 85% had surpassed analysts' earnings forecasts.

And Wall Street is becoming more optimistic about the months ahead. Analysts now expect third-quarter S&P 500 earnings to rise 29.2%, up from a 27.6% forecast at the beginning of July.