This earnings season is being hailed as "unprecedented," but the structural issues behind the numbers are raising alarms.
A recent internal report from Goldman Sachs' sales and trading desk shows that S&P 500 companies' second-quarter EPS growth rate hit 45% year-over-year. However, excluding the fair value changes from large tech companies' equity investments, this figure nearly halves to 26%.
In other words, roughly half of the "record-breaking" profit growth stems from tech giants' book revaluations of their own venture portfolios, rather than genuine expansion of operational profits.
Meanwhile, AI infrastructure-related stocks contributed about one-third of the S&P 500's overall EPS growth, further highlighting the extreme concentration of earnings growth.
For index investors, this means the profit base underpinning current valuations is far more fragile than the headline numbers suggest. The median S&P 500 company's second-quarter EPS growth was just 12%, a 33-percentage-point gap from the 45% headline figure, nearly entirely filled by the concentration effect of a few tech giants and accounting treatments.
Book Gains Prop Up Half the Growth
Goldman Sachs analyst Ioannis Blekos from the sales and trading department clearly stated in this week's report that when including the appreciation gains from large tech companies' equity investments—so-called "other income"—the S&P 500's EPS growth rate is 45%. Once these mark-to-market book gains are excluded, the growth rate drops to 26%.
The source of this discrepancy lies in tech giants like Nvidia holding substantial external equity investments. When the share prices of these invested companies rise, the holders can book the corresponding fair value changes in current-period earnings. This accounting treatment is fully compliant within the framework of accounting standards, but it essentially reflects asset price increases on financial statements, with no direct link to the core business profitability.
This means that a significant portion of the widely cited "record-breaking" earnings growth does not come from product sales, service revenue, or operational efficiency improvements, but rather from the stock market's own rise—a self-reinforcing circular logic.
AI Infrastructure Theme Dominates Growth, Concentration Risk Is Significant
Beyond book gains, the other pillar of profit growth is also highly concentrated. According to the same Goldman Sachs report, AI infrastructure-related stocks contributed about one-third of the S&P 500's second-quarter EPS growth.
The internal logic of this theme forms a closed loop: hyperscale cloud providers buy chips from Nvidia, Nvidia invests some of that capital in companies that purchase its chips, and all parties then mutually boost each other's valuations. This capital cycle can amplify book gains in the short term, but its sustainability heavily depends on the continuation of AI investment enthusiasm and the ongoing rise of related asset prices.
In contrast, the median S&P 500 company's second-quarter EPS growth was just 12%. The 33-percentage-point chasm between the headline number and the median clearly reveals the structure of current earnings growth: a few tech giants, through concentration effects and special accounting items, push the overall index's apparent earnings growth far above the actual performance of most constituents.
Options Market Sentiment Reaches Historic Extremes
As earnings data raise structural questions, market sentiment indicators are also sending abnormal signals. Ismail Abbas, an analyst at Goldman Sachs' US derivatives trading desk, noted that the daily volume of S&P 500 call options has exceeded 4 million contracts, hitting an all-time high—higher than any previous point this year and surpassing the peak during the 2021 retail frenzy.
Price action is also unusual. Abbas pointed out that the index's actual daily movement was 179 basis points, while the expected range priced by implied volatility was only ±40 basis points. The actual volatility exceeded the priced range by more than four times, and the direction was entirely upward. Goldman Sachs data shows the last time a similar move occurred was in December 2016.
Notably, despite these extreme readings, Goldman Sachs' trading desk rated the overall activity level for the day at just 4 out of 10. This means that behind the record call option volume and the lopsided surge four times greater than expected, market participants showed no significant signs of tension or hedging intent. This calmness itself may be the most noteworthy feature of the current market state.
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