S&P 500 constituent companies are about to conclude a strong Q2 earnings season. LSEG data indicates that the combined profits of index companies are expected to increase by 52% year-over-year, with the technology sector's profit growth reaching 74%. Among them, the appreciation in holdings of AI companies like Anthropic by Alphabet and Amazon has brought significant mark-to-market gains to overall profits.
If such investment gains are excluded, the S&P 500's Q2 profit growth rate is approximately 33%, still the strongest quarter since 2021, but there is a notable gap compared to the overall 52% growth rate. Amazon's Q2 net profit includes about $53.4 billion in non-operating pre-tax other income, primarily from its investment in Anthropic; Alphabet recognized $77.1 billion in unrealized gains on equity securities.
This profit structure showcases both the dividends brought by the appreciation of AI assets and the increased risk of earnings volatility. Mark-to-market gains can quickly turn into losses with market price fluctuations. Therefore, some investors believe that profits are becoming increasingly reliant on uncontrollable valuation changes, which could reduce the predictability of future performance. Goldman Sachs strategists estimate that stocks related to AI infrastructure contributed roughly one-third of the S&P 500's Q2 earnings per share growth.
Fundamentals are not solely supported by two large tech companies. Among the S&P 500's 11 major sectors, seven are projected to achieve double-digit profit growth, with the energy sector's growth at approximately 143%. As of the time of statistics, over 450 companies have reported earnings, with about 85% exceeding analyst expectations. Analyst forecasts for Q3 profit growth have also been revised upward from 27.6% in early July to 29.2%.
The market now needs to weigh strong profits against high valuations. AI investment returns enhance current data but cannot replace ongoing operating cash flow. If corporate profits continue to diffuse into sectors like finance, energy, and consumer goods, the foundation for the S&P 500's rise will be more stable; if growth continues to concentrate in a few AI assets, valuation adjustments could amplify index volatility.
