Big Tech's Anthropic and OpenAI stakes are distorting the corporate earnings picture

Recent corporate earnings figures for major tech companies have been heavily influenced by investment gains in private AI companies like Anthropic and OpenAI, according to LSEG. Microsoft, Amazon, and Alphabet have all reported sizable increases in value due to their stakes in these private entities. This has resulted in earnings growth for the S&P 500 being around 48% from a year ago, but when removing the investment gains from the calculations, growth is closer to 29%, according to Tajinder Dhillon of LSEG.

This inflation of earnings numbers has been a key factor in more companies reporting earnings above expectations this quarter, with 7% growth compared to an average of 4.4%. However, this overstatement of earnings growth is likely to even out over time. Earnings growth for the Magnificent Seven tech stocks, which now account for about 35% of S&P 500 revenue, has also been impacted, with Alphabet showing a 300% jump in earnings thanks to its investment in SpaceX.

Microsoft saw a 10 percentage point increase in earnings growth due to its Anthropic investment and $3.2 billion net income gain. These investment gains are often lumped into "other income" and are excluded from non-GAAP estimates. While some analysts see the underlying earnings growth as strong, others note that the earnings bump from these private investments may be short-lived.