Billions in Paper Gains Flood Financial Reports: Wall Street Sounds Alarm on AI-Driven Profits

U.S. large-cap technology companies reported strong surface-level profitability in their latest quarter, but a portion of their pre-tax profits are being driven by substantial valuation increases in AI-related equity investments, sparking market concerns over "earnings quality." Recent data shows that tech giants such as Alphabet (GOOG-US), Amazon (AMZN-US), NVIDIA (NVDA-US), and Microsoft (MSFT-US) have seen significant increases in "other income" in recent earnings, with a considerable portion stemming from rising valuations of stakes in other AI firms. These are unrealized paper gains, not cash flows generated from core operations like cloud services, advertising, software, or chip sales.

Alphabet's operating revenue for the quarter ended June 30 was $119.796 billion, up 24% year-on-year; operating profit was $40.77 billion, up 30%. However, the company's net "other income" reached $97.983 billion, driving pre-tax profit to $138.753 billion, meaning other income accounted for approximately 71% of the quarter's pre-tax profit.

Amazon's results were similarly influenced by external equity valuations. The company's Q2 net sales reached $200.606 billion, up 20% year-on-year; operating profit was $27.461 billion, up 43%. But net other income totaled $53.415 billion, primarily from its investment in AI firm Anthropic, pushing pre-tax profit to $80.857 billion, with other income accounting for about 66% of pre-tax profit.

Amazon's official financial report also confirmed that Q2 net profit reached $62.6 billion, far exceeding $18.2 billion in the same period of 2025, including $53.5 billion in non-operating pre-tax other income, mainly from its Anthropic investment. At the same time, the company's operating cash flow over the past 12 months increased to $161.4 billion, up 33% year-on-year, but free cash flow turned into a $7.6 billion outflow, primarily due to a significant increase in AI-related capital expenditures.

In contrast, NVIDIA and Microsoft show significantly lower proportions of "other income." NVIDIA's revenue for the quarter ended July 26 was $96.221 billion, operating profit $63.734 billion, other income $7.773 billion, and pre-tax profit $71.507 billion, with other income accounting for about 11% of pre-tax profit.

NVIDIA's core business profitability remains very strong. The company's recent financial outlook also indicates sustained strong demand for AI chips, with expected revenue growth of up to 70% in 2027, significantly higher than the market's initial expectation of 40%, driving its stock price to surge 8.7% in a single day. However, the company simultaneously warned of potential memory component supply shortages.

Microsoft's Q4 revenue ended June 30 was $90.007 billion, operating profit $40.603 billion, up 18% year-on-year; net other income was $3.444 billion, pre-tax profit $44.047 billion, with other income accounting for less than 8%. Therefore, compared to Alphabet and Amazon, NVIDIA and Microsoft's profits are relatively less dependent on equity valuation changes.

The core focus of current market attention is where these "other income" figures originate. Analysis shows two main sources: first, large tech firms' equity investments in AI companies such as OpenAI and Anthropic; second, the revaluation of holdings following SpaceX's IPO.

OpenAI and Anthropic have seen rapid valuation increases in recent quarters, allowing tech firms holding stakes in them to recognize substantial valuation gains in their financial reports. Amazon's investment in Anthropic is the most prominent example, with the company's $53.5 billion in non-operating pre-tax other income in Q2 primarily derived from this investment.

SpaceX has become another key catalyst. SpaceX completed its IPO in June, issuing approximately 638.9 million Class A common shares at an IPO price of $135 per share, raising net proceeds of about $85.675 billion after underwriting and related costs. Prior to the IPO, SpaceX had already integrated Elon Musk's xAI into its corporate structure, combining AI with space infrastructure as a central part of its capital market narrative.

After SpaceX's IPO, the value of major shareholders' stakes is now remeasured based on stock price fluctuations. Both Alphabet and NVIDIA hold shares in SpaceX, and thus may see their financial reports' other income affected by equity valuation changes. Recent regulatory filings show that as of end-June, NVIDIA held approximately 122.8 million SpaceX shares, with a value approaching $21 billion; Alphabet held about 551 million shares, valued at approximately $77 billion.

NVIDIA's ownership of SpaceX shares is directly linked to xAI. NVIDIA previously invested in Musk's xAI, and xAI was incorporated into SpaceX before its IPO, enabling NVIDIA to ultimately obtain SpaceX shares. This means that SpaceX's IPO and subsequent stock price movements will become a key variable in NVIDIA's investment gains and other income.

Under current U.S. accounting standards, certain equity investments held by companies must be measured at fair value, with valuation changes directly reflected in current earnings. For non-publicly traded equity without market quotes, the "measurement alternative" method can be used, typically only revaluing when observable transaction prices emerge, such as in a new funding round.

This explains why AI equity investment gains sometimes appear in "lump sums." Non-public AI firms are typically only revalued when a new funding round or other observable transaction occurs; once valuations rise significantly, the holding company may recognize massive paper gains in a single quarter. In contrast, publicly traded SpaceX can be remeasured based on public market price changes.

Notably, these gains are essentially paper profits from valuation changes and do not represent cash received by the company, nor are they operating revenues directly generated from core businesses like cloud services, advertising, software, or chip sales. Therefore, if valuations of related AI firms decline in the future, or if the next funding round prices are lower than previous valuations, related equities could incur paper losses.

This phenomenon has already drawn attention from Wall Street strategists and major asset managers. Reuters' Breakingviews recently pointed out that SpaceX and Anthropic themselves are still in massive investment phases, yet their investors' paper gains are significantly impacting S&P 500 corporate earnings growth, indicating a highly cyclical relationship between capital, equity, and profits in the AI industry.

Ben Snider, Goldman Sachs' chief U.S. equity strategist, said investors have long been aware of potential circular effects among large tech firms, with the core question being whether reported earnings growth reflects genuine market demand or is partially influenced by inter-company investments and valuation increases.

Manish Kabra, head of U.S. equity strategy at Société Générale, believes that large equity investment gains are prompting the market to rethink "earnings quality," and notes that related concerns have already led to adjustments in valuation metrics, with P/E ratios falling from around 25x to about 20x.

Kasper Elmgreen, chief investment officer for fixed income and equities at Nordea Asset Management, also warned that first-half earnings may have overstated the sustainable profitability of some large tech firms, as AI investment gains exhibit clear cyclical characteristics, necessitating caution.

Citi's U.S. equity strategist Scott Chronert noted that this year's large one-time equity revaluations have inflated tech firms' earnings base. If similar-scale revaluation events do not occur next year, corporate earnings growth could turn negative, creating a high earnings base risk for future financial reports.

Louise Dudley, global equity portfolio manager at Federated Hermes, believes the scale of these valuation adjustments is now too large to ignore, indeed adding extra risk. However, she also noted that large tech firms' active investments and collaborations with high-growth AI startups still hold strategic value.

The market thus faces a critical question: Are AI investments creating real economic value, or are they forming a cycle of mutual capital and valuation inflation among large tech firms? In recent years, large tech firms have simultaneously invested hundreds of billions of dollars in building AI data centers, purchasing GPUs, and expanding cloud capacity, while also acquiring stakes in AI startups through equity investments, causing capital expenditures and investment returns to intertwine within the same supply chain.

This phenomenon does not mean that large tech firms' core businesses have lost growth momentum. For example, Amazon's AWS reported Q2 revenue of $42.2 billion, up 37% year-on-year; AWS operating profit rose from $10.2 billion a year earlier to $16.6 billion, showing that AI demand is indeed translating into actual revenue and profit for cloud businesses.

NVIDIA reflects AI demand even more directly. The company's recent financial outlook shows