Microsoft, Amazon, and Alphabet posted huge Q2 profits, but much of the upside came from surging valuations in private AI firms like Anthropic and OpenAI-not from their main businesses. Investors should look past the headlines to see what's really driving results
On the surface, the latest earnings season looked like a banner quarter for Big Tech. Microsoft, Amazon, and Alphabet all reported profits that easily surpassed Wall Street's expectations, with growth rates not seen in years. But a closer look at the numbers reveals that much of this apparent success was driven by soaring valuations in private artificial intelligence companies-gains that exist only on paper and may not translate into lasting financial strength.
AI Stakes Inflate Earnings
For the second quarter of 2026, S&P 500 companies reported earnings growth of more than 48% compared to the previous year. Yet, when investment gains tied to private AI firms like Anthropic and OpenAI are excluded, that growth drops to about 29%, according to recent analysis. This adjustment brings underlying profit growth much closer to what analysts had forecast, highlighting how much these equity stakes are distorting headline results.
Amazon's numbers illustrate the effect most dramatically. The company booked a $53.4 billion pre-tax gain, mainly from its investment in Anthropic, which helped push reported net income to $62.6 billion-a staggering 243% increase from a year earlier. Without this windfall, Amazon's operating net income would have been closer to $20.8 billion, up a more modest 14%. Amazon has invested $13 billion in Anthropic and could commit up to $20 billion more, while also building ties to OpenAI through cloud infrastructure deals.
Alphabet, Google's parent, also benefited from private market markups. Alphabet holds about 14% of Anthropic and owned roughly 6% of SpaceX as of the quarter's start. When Anthropic's valuation tripled to $965 billion and SpaceX went public at a $1.77 trillion valuation, Alphabet's "other income" surged by $98 billion, boosting net income to $112.1 billion-up 298% year over year. By contrast, Alphabet's core advertising and cloud businesses grew 24%.
Microsoft saw a smaller but still notable boost, with a $3.2 billion gain-mostly from its Anthropic stake-adding about $0.27 per share to its quarterly earnings. The company separately accounts for its OpenAI investment in non-GAAP figures, underscoring how these AI relationships can swing reported results.
Accounting Choices Move the Market
These investment gains typically appear in a catch-all "other income" line, making them easy to overlook and difficult to compare across companies. Yet because the so-called Magnificent 7 stocks now account for about 35% of S&P 500 revenue, their accounting decisions can shift the entire market narrative. This quarter, companies reported earnings 7% above expectations-well above the long-term average beat of 4.4%-with much of the surprise tied to venture stake markups rather than business performance.
There's also a circular dynamic at play. Alphabet's capital helped boost Anthropic's valuation, while Anthropic's commitment to buy at least five gigawatts of computing power from Google Cloud in turn lifted Alphabet's cloud revenue. These intertwined relationships make it harder to separate genuine business growth from financial engineering.
As Reuters Breakingviews noted, SpaceX and Anthropic together accounted for half of the roughly $280 billion rise in S&P 500 net earnings this quarter, even though both companies are still losing money. Meanwhile, Big Tech's heavy infrastructure spending is burning through cash, raising questions about the sustainability of these headline profits.
Paper Gains, Real Risks
While these equity gains are real on paper, they are less certain in cash terms. Alphabet, for example, cannot currently sell any of its $94 billion SpaceX stake due to short-term sale restrictions. If SpaceX's market price or Anthropic's private valuation falls, some of these reported profits could quickly reverse in future quarters. The risk of reversal is not theoretical-similar dynamics have played out in past quarters, as seen when S&P 500 earnings growth dropped from 25% to 17% after stripping out Amazon and Alphabet's investment gains, according to reporting by TheStreet.
Both Anthropic and OpenAI have filed confidentially with the Securities and Exchange Commission and are moving toward potential public listings, but neither has set a firm date. Anthropic's valuation now stands at $965 billion, while OpenAI's most recent private valuation was about $300 billion. Combined with SpaceX's $1.77 trillion market cap, these AI investments represent trillions in paper wealth that may not be matched by actual revenue or cash flow.
Anthropic's annualized revenue has grown from about $9 billion to $47 billion by early 2026, making its valuation swings unusually significant for its corporate backers. Still, investors should be cautious about treating these paper gains as a sign of lasting business strength. As seen with Meta's recent struggles to convince investors of the payoff from its own AI infrastructure spending-a topic explored in this analysis of Bank of America's renewed conviction in Meta-headline numbers can mask deeper uncertainties.
For now, the underlying businesses at Microsoft, Amazon, and Alphabet are still growing, but the market's willingness to reward paper gains may be tested once these AI labs actually start trading publicly. Investors would be wise to look beyond the headlines and examine the footnotes before making decisions based on reported profits.
According to company filings for the second quarter of 2026, Amazon's $53.4 billion pre-tax gain from Anthropic and Alphabet's $98 billion "other income" from Anthropic and SpaceX together accounted for a substantial share of the S&P 500's total earnings growth. The Magnificent 7's dominance means that their accounting for private equity stakes can have an outsized impact on the index's reported results, even as the underlying cash flow from these investments remains uncertain.
Private company valuations can have a dramatic effect on public company earnings, especially when those stakes are large and the companies involved are not yet profitable. Unlike realized gains from selling an asset, paper gains reflect changes in estimated value that may never be converted to cash. For investors, this means that headline profit numbers can be misleading if they do not account for the volatility and illiquidity of private market investments. As more tech giants tie their fortunes to the unpredictable world of AI startups, understanding the difference between operating income and mark-to-market gains will become increasingly important for anyone tracking the health of the sector.
