To The Moon

Second-quarter $S&P 500(.SPX)$ earnings appear spectacular: aggregate profit increased roughly 52% from a year earlier. A large share of that growth, however, came from unrealised gains on stakes in private artificial-intelligence companies. The underlying earnings expansion remains strong, but investors should distinguish operating performance from gains that can reverse without a dollar of cash entering the business.

The clearest example is $Amazon.com(AMZN)$. It reported on July 30 for the quarter ended June 30 that net income rose to $62.6 billion from $18.2 billion. Yet $53.4 billion of quarterly non-operating pretax income came primarily from investments in Anthropic. Amazon’s operating income still increased to $27.5 billion and AWS revenue grew 37%, so the business improved substantially even after removing the investment gain. Amazon’s earnings release filed with the SEC makes that distinction explicit.

$Alphabet(GOOG)$ presents a similar tension. Its July 22 results for the June quarter showed revenue growth of 24% to $119.8 billion, Google Cloud growth of 82% and operating-income growth of 30%. EPS increased much faster because gains on equity securities lifted non-operating income. $Alphabet(GOOGL)$’s official second-quarter SEC exhibit provides the operating results.

According to an analysis published August 20, aggregate S&P 500 earnings rose about 52%, but the increase was still approximately 33% after excluding unusually large AI-related investment gains—the strongest underlying improvement since 2021. Technology-sector earnings increased roughly 74%, while AI-infrastructure companies supplied about one-third of index-level EPS growth. Reuters’ August 20 analysis provides the adjusted comparison and sector contribution.

That evidence supports a nuanced bullish case. Even after removing mark-to-market gains, profit growth is broad and substantial, with seven of eleven sectors expanding. Cloud demand, advertising, energy pricing and operating leverage are producing real revenue and cash flow. Rising private-AI valuations also have economic value if the companies eventually go public or are sold.

The bearish risk is double counting. Investors may capitalise the higher reported EPS while also assigning premium valuations to the operating AI businesses that created the private-company gains. Unrealised gains are driven by funding-round valuations and accounting marks, not recurring sales, and can reverse. Meanwhile, hyperscalers are spending heavily on data centres; Alphabet recently reported negative free cash flow as capital expenditure accelerated, while financing guarantees and debt issuance are expanding across the AI ecosystem.

The broad market fell on August 20, with the S&P 500 down 0.9% and the $NASDAQ(.IXIC)$ down 1.0%, as rising bond yields and Walmart’s consumer warning outweighed the earnings narrative. That price action shows the importance of the discount rate: even strong profits may not support higher valuations when long-term yields rise. For this theme, operating income, free cash flow and capital-expenditure returns are more useful confirmation signals than a single index support level.

The evidence leans moderately bullish on underlying earnings but neutral on index valuation. Profit growth remains impressive after removing investment marks, yet headline EPS overstates recurring cash economics and high yields limit multiple expansion. The view would become more bullish if operating cash flow outgrows capital spending and earnings breadth persists; it would turn bearish if private-AI valuations reverse, capex fails to generate revenue or underlying growth falls sharply below the adjusted 33% pace. This is personal opinion for education and is not financial advice.

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Disclaimer: This article is for informational and educational purposes only and does not constitute financial, investment, or trading advice. The views expressed are personal opinions based on publicly available information and are subject to change without notice. Investors should conduct their own research and consider their financial situation, risk tolerance, and investment objectives before making any investment decisions. I do not guarantee the accuracy or completeness of the information presented.