S&P 500 trades at 27 times trailing earnings, above 16x historical average
A Wall Street Journal analysis has calculated that Amazon and Alphabet together recorded roughly $121 billion in after-tax “other income” in the second quarter, with nearly all of it attributable to mark-to-market gains on equity investments in other companies. Alphabet’s portion is on track to represent about 10% of S&P 500 second-quarter earnings and Amazon’s another 5%, according to columnist Jonathan Weil’s review of the earnings season. “Other income” accounted for 71% of Alphabet’s quarterly profit and 66% of Amazon’s, Weil reported.
Alphabet’s mark-to-market gains came from revaluing equity holdings that include SpaceX and Anthropic, the artificial-intelligence developer behind Claude. Amazon’s markups primarily arose from its stake in Anthropic, Weil reported.
S&P 500 companies reported $2.64 trillion of combined net income over the trailing four quarters, according to data compiled by S&P Global Market Intelligence. Investment gains are recorded in net income under U.S. generally accepted accounting principles (GAAP), and the revaluations are typically treated as nonrecurring when analysts assess operating profitability.
“Nobody trying to assess the valuations at Alphabet or Amazon should be placing a market multiple on them,” Weil wrote. “These are unrealized paper profits, and they are inherently nonrecurring.”
On a trailing four-quarter basis, S&P 500 earnings are up 31% versus the year-earlier period, according to S&P data. Excluding Amazon and Alphabet, the figure is 24%, growth Weil described as “still spectacular.”
Weil characterized the treatment of investment markups as “utter inconsistency” and wrote that “Wall Street lacks a unified approach for investment markups.” Last quarter, Nvidia steered analysts to exclude unrealized investment gains from its adjusted earnings, and analysts complied, with Nvidia reporting an adjusted profit of $45.5 billion rather than the $58.3 billion in net income. Alphabet and Amazon did not direct analysts to exclude similar gains, so analysts included them in Street earnings.
Weil described Nvidia’s approach as “a rare instance of conservatism.” The norm at U.S. companies, he wrote, is “for management to gild the lily, knowing the analysts at big Wall Street brokers will relay the spin as their own.”
“Street earnings” refers to the consensus profit metric compiled by Wall Street analysts, which typically strips out certain non-operating items and excludes some recurring costs depending on each company’s practice. FactSet data cited by Weil show that Street earnings exclude stock-based compensation for at least 65 companies in the S&P 500. Broadcom, for example, reported $9.3 billion in net income but $12.1 billion in non-GAAP earnings after management excluded stock-based compensation and amortization of intangible assets.
Weil wrote that “the distortions also extend to forward estimates.” The S&P 500 is priced at 19 times FactSet’s 2027 consensus earnings estimate, Weil reported, but those estimates are built on Street earnings rather than GAAP figures. On a trailing basis, the index trades for 24 times Street earnings, a figure lower than the P/E ratio using GAAP net income, but analysts chose not to exclude the big markups at Alphabet and Amazon from Street earnings.
“Counting gains in volatile equities when they go up while subtracting everyday operating costs isn’t analysis,” Weil wrote. “It’s marketing, which of course is what Wall Street is all about. Investors beware.”
MSI previously reported that Alphabet posted a second-quarter profit of $112.11 billion, or $9.11 per share, up from $28.2 billion a year earlier. Weil’s column attributes a substantial share of that quarter’s profit to mark-to-market revaluations of Alphabet’s holdings in SpaceX and Anthropic.