AI Boom Propels S&P 500 to 47% Earnings Growth, But One-Time Gains Tell a Different Story

The earnings boom is only getting stronger. Here's what that means

A strong earnings backdrop that was already underpinning the bull case for many investors this year has gotten positively explosive, thanks to the AI boom. The S & P 500 is now on track to deliver second-quarter earnings growth of 47% on a yearly basis, up from around 20% prior to the start of the season, according to FactSet data. The blistering pace is unusual in that it's usually reserved for recoveries from recessions or other disastrous circumstances. In 2021, for example, the broader index posted an earnings growth rate of more than 90% -- but that was when the market was coming out of the throes of the Covid pandemic. Similarly, in the first quarter of 2010, it grew earnings at a pace of 55%, but that was from the depressed levels of the financial crisis. Instead, the current earnings boom is being driven by a historic period of investment into artificial intelligence, with just two companies now driving outsized earnings growth: Alphabet and Amazon . But even without those two stocks, the S & P 500 is still on pace to deliver earnings growth of more than 28%, which would mark a seventh straight quarter of double-digit earnings growth, FactSet data shows. "It is, in my opinion -- and I don't think this is even being hyperbolic -- probably the best earnings quarter that I've ever seen in my 30 years doing this," Mark Hackett, chief market strategist at Nationwide. The powerful earnings backdrop only adds to confidence in the stock market, which on Wednesday was at all-time highs thanks to a positive confluence of events. Oil prices slid , as geopolitical headwinds receded. Tech rallied, following a crisis at Situational Awareness that many investors expect was a clearing event for the market. The latest earnings from Palantir and others this week are only adding to the recent momentum. On Tuesday, the S & P 500 crossed 7,700 for the first time ever. The iShares Semiconductor ETF (SOXX) climbed more than 15% over the last four trading sessions, though it was down Wednesday. "All these people that were on the sidelines last week now have to jump in with both feet in order to get back in," said Hackett. "That is the type of panic that people have when they're on the sidelines and markets start running." Not everything may be as good as it seems, however. Take Amazon and Alphabet, for example. Earnings growth was driven in part by large, one-time equity gains in their ownership of companies such as Anthropic and SpaceX , which may not be replicated in the coming quarters. In fact, Sam Stovall, chief investment strategist of CFRA, pointed out that while there have been upward revisions to 2026 earnings, there have been downward revisions for 2027 earnings, down to roughly 13.5% from 18%, that could make investors wary. "I think the question that some investors are going to be asking themselves is: Was Q2 the peak in earnings?" Stovall said. "And is that something we have to factor into our target price projections?" For now, however, the earnings backdrop has added to conviction in the near-term outlook, he said. The recent gains in tech could further buoy the indexes. "In the short term, the trend is your friend," Stovall said.

Big Tech's Anthropic and OpenAI stakes are distorting the corporate earnings picture

Tech companies' venture capital portfolios are making corporate profits look a lot stronger than they really are. Microsoft, Amazon and Alphabet booked sizable investment gains in the most recent quarter thanks to stakes in Anthropic and OpenAI, and in one case, SpaceX. Anthropic and OpenAI have both seen soaring valuations in private markets, with both valued just south of $1 trillion amid the ongoing AI boom. Microsoft and Amazon are private shareholders in those companies, while Google has a stake in Anthropic. As a result, they need to account for an increase in the value of their stakes in quarterly income statements. But that doesn't reflect profits generated by selling software, or other services. These gains in private investments across a handful of companies has already had an outsized impact on overall earnings growth, according to LSEG. Earnings growth for the S&P 500 in the most recent quarter is up around 48% from a year ago, according to LSEG's head of earnings and equity research Tajinder Dhillon. When adjusting to pull out out those investment gains from private AI companies, Dhillon points out that the growth is much more muted. Without those gains from just Alphabet and Amazon's private company stakes, aggregate earnings growth would be sitting around 29%, according to Dhillon. That's much closer to what analysts had been forecasting. The consensus for the quarter was 24% growth. "The headline earnings numbers were very much inflated by equity gains in OpenAI, Anthropic and SpaceX," Gil Luria, managing director and head of technology research at D.A. Davidson, told CNBC. "Having said that, these types of moves tend to even out over time, which is why we typically exclude them from a non-GAAP view and from forecasts." Most analysts are excluding these one-time items in their estimates. But in the near term, it resulted in more earnings upside surprises. Companies this quarter have reported earnings 7% above expectations, according to LSEG. That compares to a long-term average of 4.4% above consensus.

What lies beneath these exceptional earnings

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.