Equity stakes in private AI firms are inflating the quarterly earnings of Big Tech companies and distorting the broader S&P 500 picture.
These accounting entries create a misleading impression of growth because the gains exist only on paper. They do not represent the real-time operational growth of the underlying AI businesses, potentially masking weaknesses in core corporate performance.
Microsoft, Amazon, and Alphabet have taken significant positions in AI firms such as Anthropic and OpenAI. In the most recent fiscal quarter, which ended June 30 [3], Microsoft recorded a $3.2 billion profit from its investment in Anthropic [1]. However, the company's bet on OpenAI proved less lucrative during the same period, as it recorded a $600 million loss [2].
These volatile swings in valuation impact the overall earnings narrative for the largest companies in the U.S. market. Because these valuations are based on internal or private assessments rather than public market trades, they can significantly shift a company's reported bottom line without any change in actual cash flow.
Kate Rooney of CNBC said, "When stripping out Big Tech’s investment gains from private AI companies, the earnings story is a lot less bullish."
This trend extends beyond the primary AI labs to other high-profile ventures, including SpaceX. The reliance on these paper gains creates a gap between reported profitability and the actual revenue generated by AI products, and services. This discrepancy makes it difficult for investors to determine if the AI boom is delivering tangible financial returns or if the growth is primarily a result of accounting maneuvers.
“The earnings story is a lot less bullish when stripping out Big Tech’s investment gains.”
The reliance on 'paper gains' from private equity suggests that the perceived success of the AI revolution in corporate earnings reports may be decoupled from actual product revenue. If these private valuations correct downward, Big Tech firms could face sudden, massive earnings hits that have nothing to do with their operational efficiency or market share.
