S&P 500 companies are closing out one of the strongest earnings seasons in years.

At first glance, the numbers are extraordinary.

Aggregate second-quarter earnings are on track to rise approximately 52% from a year earlier.

Technology-sector profits are up roughly 74%.

Around 85% of S&P 500 companies that have reported results have beaten analyst earnings expectations.

And expectations for the third quarter are still moving higher.

Those figures suggest corporate America is experiencing an exceptional profit boom.

But the headline numbers require a closer look.

A significant portion of the apparent earnings growth comes from mark-to-market gains on artificial intelligence investments held by some of the largest technology companies.

Remove those gains and estimated S&P 500 second-quarter earnings growth falls from roughly 52% to around 33%.

That is still extremely strong.

But the gap matters.

It raises a question investors increasingly need to answer: how much of the S&P 500 earnings boom reflects sustainable operating growth, and how much comes from rapidly rising valuations across the AI ecosystem?

S&P 500 Earnings Are Growing 52%

According to LSEG data, S&P 500 companies are on track to report approximately 52% aggregate earnings growth for the second quarter of 2026.

That represents one of the strongest quarterly performances since the pandemic recovery.

Technology is the largest contributor.

The sector is expected to report profit growth of roughly 74% from the same period a year ago.

Those numbers help explain why U.S. equities have remained resilient despite high Treasury yields, geopolitical risks and persistent concerns about inflation.

Strong earnings can offset higher valuations.

If corporate profits rise quickly enough, stocks can continue advancing even when price-to-earnings multiples already look expensive.

That has been a central pillar of the S&P 500 rally.

But this quarter's numbers include several unusually large investment gains.

Alphabet and Amazon Added Huge Mark-to-Market Profits

Alphabet and Amazon both hold significant stakes in private AI companies.

As the valuations of those investments increased, the companies recorded large unrealized gains.

Amazon's second-quarter net income included approximately $53.4 billion in non-operating pre-tax income, primarily connected to investments including its stake in Anthropic.

Alphabet reported approximately $77.1 billion in unrealized gains on equity securities.

These are accounting gains.

They increase reported earnings because the value of the underlying investments has risen.

But they are not the same as revenue generated from selling cloud services, advertising, hardware or other core products.

That distinction is important for investors analyzing earnings quality.

S&P 500 Growth Falls to 33% Without Those Gains

LSEG estimates that excluding the large mark-to-market gains, S&P 500 second-quarter profit growth would be around 33%.

That is still an exceptional number.

In fact, it would still represent the strongest quarterly earnings growth since 2021.

So the key conclusion is not that the S&P 500 earnings boom is fake.

It is that the headline 52% figure exaggerates the strength of underlying operating growth.

A 33% increase in corporate profits is fundamentally strong.

A 52% increase is extraordinary.

Investors need to understand why the two numbers differ.

What Are Mark-to-Market Gains?

Mark-to-market accounting requires certain investments to be valued according to their current estimated market price.

If the investment rises in value, the company can record a gain.

If the investment falls, it can record a loss.

This means earnings can change significantly even when the underlying operating business has not changed.

For example, imagine a company owns a private technology investment valued at $10 billion.

If that investment is later valued at $20 billion, the company may record a substantial unrealized gain.

But it has not necessarily received $10 billion in cash.

If the investment's valuation later drops, part of the previous gain could disappear.

That is why investors often separate operating earnings from mark-to-market gains.

AI Valuations Are Now Influencing Index Earnings

The scale of the current AI investment cycle makes this issue unusually important.

Companies including Microsoft, Alphabet, Amazon, Meta and Nvidia are spending enormous amounts on AI infrastructure.

At the same time, large technology companies have invested directly in private AI developers.

The value of those investments has surged as venture capital and strategic investors assign increasingly high valuations to leading AI companies.

This creates a feedback effect.

Rising AI valuations boost the reported earnings of public companies that own stakes in private AI firms.

Those stronger reported earnings can then support higher valuations for the public companies themselves.

If AI valuations continue rising, the cycle can appear extremely powerful.

But if private valuations fall, the accounting effect can reverse.

Mark-to-Market Gains Can Become Losses

This is the main risk.

An unrealized investment gain is not guaranteed to remain a gain.

If the value of an investment declines, companies may need to record losses in future quarters.

That creates additional volatility in reported earnings.

Bank of America strategist Savita Subramanian has warned that increasing dependence on mark-to-market gains reduces earnings visibility.

The issue is not that these gains are illegitimate.

They reflect real changes in asset values.

The problem is predictability.

Operating revenue from subscriptions, advertising or cloud services can often be modeled using customer growth, pricing and demand.

The future valuation of a private AI company is much harder to forecast.

AI Infrastructure Drives a Third of EPS Growth

Goldman Sachs estimates that AI infrastructure stocks account for approximately one-third of S&P 500 earnings-per-share growth during the second quarter.

That shows how influential the AI investment cycle has become.

AI is no longer simply one sector theme.

It is increasingly affecting the earnings profile of the entire U.S. equity benchmark.

Semiconductor companies benefit from chip demand.

Cloud providers benefit from computing demand.

Utilities and energy companies benefit from data-center power requirements.

Infrastructure suppliers benefit from new construction.

Networking companies benefit from increased data traffic.

And investors in private AI firms benefit when valuations rise.

This creates a broad earnings ecosystem around artificial intelligence.

The Technology Sector Is Up 74%

Technology's estimated 74% earnings increase is one of the strongest sector results in the index.

That is another reason the S&P 500 remains heavily dependent on tech.

Large technology companies carry enormous index weights.

When their earnings rise quickly, they can lift aggregate S&P 500 profit growth even if smaller sectors perform less dramatically.

This creates a concentration effect.

Investors buying an S&P 500 fund may believe they are buying broad diversification.

In practice, performance remains heavily influenced by a relatively small number of very large companies.

That concentration is not necessarily a problem while earnings remain strong.

It becomes more important if the AI investment cycle weakens.

Earnings Growth Is Not Only a Technology Story

There is an important counterargument.

The S&P 500 earnings recovery is broader than AI.

Seven of the index's 11 major sectors are currently expected to report at least double-digit year-over-year profit growth.

Energy stands out.

The sector is estimated to deliver approximately 143% earnings growth during the quarter.

That suggests corporate profit strength is not entirely dependent on technology.

A broad earnings expansion is generally healthier than one concentrated in a single industry.

It provides more support for the index and reduces the risk that one disappointing technology quarter causes aggregate earnings to collapse.

85% of Companies Are Beating Estimates

Another positive signal is the earnings beat rate.

Approximately 85% of S&P 500 companies that have reported results are beating analyst earnings expectations.

More than 450 companies had reported by the latest LSEG count.

That is an unusually high percentage.

Companies routinely beat Wall Street estimates because analysts and management teams tend to guide expectations carefully.

But an 85% beat rate still indicates that corporate results are broadly exceeding what investors expected entering the quarter.

This matters because stock markets respond to expectations rather than absolute numbers.

A company can report strong growth and still fall if investors expected even more.

The current earnings season suggests expectations were not high enough across much of the index.

Third-Quarter Forecasts Are Rising

Another constructive signal is what analysts expect next.

S&P 500 companies are currently expected to deliver approximately 29.2% earnings growth during the third quarter.

At the beginning of July, the estimate was around 27.6%.

Normally, analyst earnings estimates tend to decline as a quarter approaches.

Companies provide cautious guidance.

Economic data changes.

Analysts revise optimistic forecasts downward.

When estimates rise instead, it suggests corporate guidance has been stronger than expected.

That gives bulls an important argument.

Even if Q2's 52% headline number is inflated by investment gains, underlying earnings momentum appears to remain strong.

The Real Question Is Earnings Quality

Investors therefore need to separate two debates.

The first is whether earnings are strong.

They clearly are.

Even excluding the largest AI investment gains, approximately 33% growth would represent a highly impressive quarter.

The second question is how sustainable those earnings are.

That is much harder.

Operating earnings generated from recurring business activity are generally considered higher quality than gains produced by changing investment valuations.

If more of S&P 500 profit growth begins depending on asset prices, earnings can become increasingly procyclical.

Rising markets create gains.

Those gains improve earnings.

Improved earnings support rising markets.

But the same cycle can work in reverse.

AI Financing Is Becoming More Complicated

Investors are also becoming more concerned about how the AI infrastructure boom is being financed.

Technology companies are committing hundreds of billions of dollars to data centers, chips, energy infrastructure and AI models.

Some projects involve partnerships where technology suppliers help finance customers purchasing their own equipment.

Nvidia recently agreed to provide a guarantee of up to $105 billion connected to an OpenAI data-center development in Ohio.

Arrangements like this have attracted attention because they create questions about how independently demand is being financed.

If customers require supplier-backed guarantees or other financing support to purchase AI infrastructure, investors may begin questioning how sustainable the current spending cycle is.

Is AI Demand Pulling Future Growth Forward?

This is one of the central risks for the S&P 500.

AI infrastructure investment is happening at an extraordinary pace.

Companies are building computing capacity based on expectations of enormous future demand.

If those expectations prove correct, today's spending could look justified.

AI could produce new products, higher productivity, improved margins and entirely new revenue streams.

But there is another possibility.

Companies may be investing years ahead of actual demand.

That would mean part of today's earnings growth is effectively borrowing from the future.

Infrastructure suppliers receive revenue immediately.

Customers absorb large capital expenditures.

If end-user AI revenue takes longer to materialize, the industry may eventually face a period of slower spending.

That could pressure one of the biggest sources of current S&P 500 earnings growth.

High Valuations Increase the Stakes

Strong earnings are especially important because U.S. equity valuations remain elevated.

Investors are willing to pay high multiples for companies expected to deliver exceptional future growth.

That works as long as earnings expectations continue rising.

If profit growth slows, valuations can compress quickly.

A stock trading at 30 times earnings requires a much stronger growth outlook than one trading at 15 times earnings.

This is why earnings quality matters.

A one-time mark-to-market gain may increase current earnings.

It does not necessarily justify a permanently higher valuation.

Markets eventually need recurring operating profits.

The S&P 500 Is Still Broadly Profitable

Despite those concerns, the earnings picture remains fundamentally constructive.

Removing the largest accounting gains still leaves approximately 33% profit growth.

Seven sectors are growing earnings at double-digit rates.

The majority of companies are beating expectations.

Third-quarter estimates are rising.

These are not signs of an earnings recession.

The more nuanced conclusion is that headline figures currently make corporate growth look even stronger than it already is.

That distinction matters when investors compare 2026 with previous earnings cycles.

What Happens If AI Valuations Fall?

A decline in private AI-company valuations could create several effects.

First, public companies holding those investments could record mark-to-market losses.

That would reduce reported earnings.

Second, lower valuations could make private AI companies less willing or able to raise capital.

That could reduce spending on chips and data centers.

Third, public AI stocks could experience valuation compression.

That would affect the S&P 500 because many of those companies carry very large index weights.

The combination could create a much weaker earnings environment even if the broader economy remained relatively healthy.

What Happens If AI Revenue Accelerates?

The bullish scenario is equally powerful.

If AI products generate enough revenue to justify current infrastructure spending, today's investment cycle could create years of earnings growth.

Cloud providers could monetize additional computing demand.

Semiconductor companies could maintain high margins.

Software businesses could charge premiums for AI features.

Data-center demand could remain elevated.

And companies holding equity in successful AI startups could continue recording gains.

Under that scenario, the current earnings boom would look less like a temporary accounting distortion and more like the early stage of a structural profit cycle.

What Investors Should Watch

Several indicators will help determine which scenario develops.

The first is operating earnings excluding investment gains.

If underlying profit growth remains above 20% or 30%, the S&P 500 earnings story remains strong even without mark-to-market effects.

The second is AI capital expenditure.

Investors should watch whether Microsoft, Meta, Alphabet, Amazon and other major spenders continue increasing infrastructure budgets.

The third is AI revenue.

Spending alone cannot justify valuations indefinitely.

Companies need evidence that customers are paying for AI products and services.

The fourth is earnings breadth.

Strong growth across energy, industrials, financials and consumer sectors would reduce dependence on technology.

The fifth is forward guidance.

Rising Q3 estimates are encouraging, but analysts will need to see that momentum continue into 2027.

52% Is a Great Headline — 33% May Be the More Important Number

The headline number is impressive.

S&P 500 earnings growth of approximately 52% sounds like an extraordinary corporate profit boom.

And in many ways, it is.

But investors should not ignore the effect of AI-related investment gains.

Without those gains, estimated Q2 growth falls to approximately 33%.

That number may actually provide a clearer picture of underlying corporate strength.

And 33% is still exceptionally strong.

The difference tells investors something important about the current market.

The S&P 500 does not need AI accounting gains to show robust earnings growth.

But those gains are making an already strong cycle look even more powerful.

That can support valuations in the short term.

It can also create greater risk if AI valuations eventually reverse.

For now, corporate earnings remain one of the strongest arguments supporting the S&P 500.

The next phase of the rally will depend on whether companies can convert the current AI investment boom into recurring operating profits rather than relying increasingly on rising asset valuations.

If they can, today's high earnings growth may prove sustainable.

If they cannot, the gap between headline profits and underlying earnings quality could become one of the biggest risks facing the index.

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Source: Crypto Daily