US tech giants' venture capital holdings are significantly distorting corporate earnings, making profits appear much stronger than underlying business operations would suggest. Latest financial reports show that Microsoft, Amazon, and Alphabet recorded substantial investment gains from their stakes in Anthropic, OpenAI, and SpaceX during the recent quarter. While the earnings season is not without real growth, the valuation surges of these private AI companies have notably amplified headline EPS figures, prompting Wall Street to shift its evaluation focus toward operating income and free cash flow.
The surge in private market valuations for Anthropic and OpenAI, both nearing $1 trillion, has forced their major non-public shareholders—including Microsoft, Amazon, and Alphabet—to recognize the increased value of their holdings in quarterly income statements. This accounting gain, however, does not represent cash generated from selling software or other core business services. Data compiled by LSEG indicates that these non-listed investment gains from a handful of companies have had an unusually large impact on the overall earnings growth of the earnings season, overstating the true acceleration of core business by approximately 45% to 48% of S&P 500 earnings growth for the second quarter of 2026.
FactSet's latest data shows index earnings grew 47.4% year-over-year. Excluding Alphabet and Amazon, this growth rate falls to 28.8%. Goldman Sachs highlights that the S&P 500's Q2 headline EPS rose 45% year-over-year, but 19 percentage points of that came from unrealized gains on equity investments by Alphabet and Amazon. The actual growth rate, after stripping out these gains, is approximately 26%. The growth is highly concentrated among the top ten AI infrastructure companies, which contributed nearly 80% of the EPS increase.
Amazon confirmed $53.4 billion in non-operating pre-tax gains, primarily from its investment in Anthropic. Alphabet recorded $98 billion in "other income," mainly from unrealized gains on equity securities. These gains are legitimate under accounting rules but do not represent operating profit from AI cloud services, advertising, or software, nor do they generate equivalent cash flow. The strong Q2 earnings season is not a "false boom," but rather a period of robust underlying earnings layered with an unusually thick layer of private equity valuation gains.
LSEG's Tajinder Dhillon noted that S&P 500 companies' EPS for the recent quarter is expected to grow roughly 48% year-over-year. Excluding investment gains from private AI companies, the growth rate would be significantly more moderate, dropping to around 29% when removing gains from Alphabet and Amazon alone. This figure is closer to the analyst consensus forecast of roughly 24% growth for the quarter. Gil Luria of D.A. Davidson stated that overall earnings are largely inflated by gains from OpenAI, Anthropic, and SpaceX, but these value changes tend to offset over time, which is why they are typically excluded from non-GAAP metrics and baseline forecasts.
The impact of these gains is significant given the outsized weight of mega-cap tech stocks in the market. The "Magnificent Seven" account for about 35% of S&P 500 Q2 revenue and roughly one-third of the index's weight. These investment gains are often categorized as "other income," leading to varied reporting. Amazon, an early investor in Anthropic and a supporter of OpenAI, saw its Q2 profit rise over 240% year-over-year, but stripping out its investment gains brings the increase closer to 17%. Alphabet's net profit surged nearly 300%, but after removing gains from SpaceX and Anthropic, the growth rate is about 23%. For Microsoft, the impact is more moderate, with earnings growth boosted by roughly 10 percentage points from its Anthropic stake, and it also recorded a $4.8 billion gain from OpenAI.
This trend highlights the deep integration between AI leaders and large tech companies even before they enter public markets. Both Anthropic and OpenAI have confidentially filed with the SEC for potential IPOs within the next year. Luria cautions that these gains can balance out with market volatility, noting that SpaceX's shares have fallen about 50% from their peak post-IPO, which could lead to a significant reversal for Alphabet in the next quarter. Jeff Kilburg of KKM Financial describes these "massive" profits as "sprinkles on top" of an already strong earnings season, emphasizing that even without non-listed assets, the earnings jump is "eye-popping."
The core business of these tech giants remains in expansion. Amazon's Q2 sales grew by about 20%, operating profit by 43%, and AWS revenue by 37%. Alphabet's operating profit rose 30%, with operating margins hitting 34%. Microsoft saw net profit and EPS grow 22% and 23% respectively, excluding the impact of its OpenAI investment, while cloud revenue grew 27%. This strong growth from cloud giants suggests AI is generating real revenue through cloud services, B2B advertising, and enterprise software. However, earnings growth at the index level is increasingly concentrated among a few AI platforms, chip giants, and cloud infrastructure companies. The market is consequently reducing its reward for simple "EPS beats" and instead scrutinizing cloud growth rates, order backlogs, operating margins, and free cash flow after capital expenditure.
The gains from valuing Anthropic, OpenAI, or SpaceX are largely unrealized, non-cash gains. They boost "other income," net profit, and balance sheet investment values but do not result in cash inflow. In cash flow statements, these gains are typically deducted from net profit, meaning they do not directly increase operating cash flow. A deeper risk lies in the intertwined structure where tech giants invest in AI leaders while also selling them cloud computing power, providing financing, and revaluing their stakes based on subsequent funding rounds or IPO prices, creating a "capital input—cloud order—valuation increase—paper gain" cycle. When private valuations rise, it strengthens profits, balance sheets, and the AI narrative, but a downturn can quickly reverse "other income."
Goldman Sachs projects that capital expenditure by major AI providers will rise from approximately $755 billion in 2026 to about $920 billion in 2027, with tech giants potentially issuing roughly $400 billion in investment-grade bonds in 2027. Therefore, investors should neither dismiss the entire earnings season due to the inflated Q2 EPS nor capitalize these one-time gains as permanent profit. The future trajectory of large-cap tech stocks will be determined by operating profit growth, excluding equity revaluation, and whether AI capital expenditure can generate sustainable free cash flow returns sufficient to cover depreciation, interest, and financing costs.
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