National earnings season is ending on a high note for the S&P 500, with analysts projecting a 52% increase in aggregate second‑quarter profit compared with the same period last year. The surge is anchored by a 74% profit jump in the technology sector, largely reflecting sizable mark‑to‑market gains at AI‑heavy companies.
AI investments boost earnings
Alphabet and Amazon each recorded massive unrealized gains from their stakes in AI start‑ups. Alphabet posted a $77.1 billion unrealized gain on equity securities, while Amazon reported $53.4 billion of non‑operating pre‑tax other income, primarily from its investment in Anthropic. Those gains alone lifted the S&P 500’s earnings growth to more than 50% for the quarter.
When the AI‑related gains are stripped out, the earnings estimate still shows a 33% year‑over‑year increase, according to Tajinder Dhillon, head of earnings research at LSEG. That would still represent the strongest quarterly growth since the pandemic‑era surge of 2021, though analysts caution that reliance on mark‑to‑market accounting can mask underlying volatility.
Analyst cautions on valuation and financing
Bank of America equity strategist Savita Subramanian warned that “mark‑to‑market gains can turn into losses just as fast,” noting that earnings increasingly depend on factors beyond a company’s direct control. Goldman Sachs strategists estimate that AI infrastructure stocks account for roughly one‑third of the S&P 500’s earnings‑per‑share growth in the second quarter.
Investors remain uneasy about lofty AI valuations and financing structures. Nvidia, the world’s most valuable company, recently pledged up to $105 billion in guarantees to help OpenAI lease a new data center in Ohio. While Nvidia’s shares rose on the announcement, they fell the next day amid a broader technology pullback tied to concerns over the cost of AI build‑outs and a jittery bond market.
“As far as the hyperscalers go, they’re borrowing money, they’re selling stock,” said Michael O’Rourke, chief market strategist at JonesTrading in Stamford, Connecticut. “We’re probably stealing from the future here. 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.”
Broad sector strength
Technology is not the only driver. Seven of the eleven major S&P 500 sectors posted double‑digit year‑over‑year earnings gains, with the energy sector leading at an estimated 143% increase for the quarter. Overall, about 85% of the index’s constituents have beaten analyst expectations, based on data from more than 450 companies reported to LSEG.
Looking ahead, analysts have raised their third‑quarter earnings outlook, now projecting a 29.2% profit gain for S&P 500 firms, up from 27.6% at the start of July. The optimism reflects continued strong performance across multiple sectors, even as market participants keep a watchful eye on AI‑related valuation risks.
What this means for investors
While the headline numbers are impressive, investors should weigh the sustainability of AI‑driven earnings growth against the potential for rapid reversals in mark‑to‑market valuations. Diversification across sectors and a focus on companies with solid cash‑flow fundamentals may help mitigate the heightened volatility associated with the current AI boom.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
