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

Corporate earnings for major tech companies have been boosted significantly by their investments in AI startups Anthropic and OpenAI, as well as SpaceX. Microsoft, Amazon, and Alphabet have all seen substantial gains from their stakes in these companies, which they must account for in their quarterly income statements, even though these gains do not reflect direct profits from software or services.

As a result, earnings growth for the S&P 500 has appeared stronger than it truly is. Without adjusting for these investment gains, growth would be around 29%, closer to analysts' expectations. Industry experts agree that these one-time items are typically excluded from non-GAAP views and forecasts, but in the short term, they caused a notable earnings surprise.

The "Magnificent Seven" tech stocks, including these Big Tech firms, have an outsized influence on the market, making up about 35% of S&P 500 revenue. These investment gains are often grouped as "other income" and reported inconsistently. Amazon's $50 billion investment in OpenAI and Anthropic led to a 240% increase in earnings, while Alphabet's gains mostly came from its SpaceX stake, resulting in a nearly 300% surge in bottom-line growth.

Microsoft's impact was more moderate but still noteworthy, with a 10 percentage point increase in earnings growth and $3.2 billion in net income from Anthropic. The intertwined relationship between these AI companies and Big Tech highlights the complex earnings dynamics at play, with potential for volatility as these startups prepare for their own public listings.