US Stock Earnings Season Sees Surge in Profits: Where Is the Watered-Down Content?

The Q2 2026 earnings season for US stocks is reshaping market expectations for profitability. The year-over-year EPS growth rate for S&P 500 companies once reached 45%, far exceeding the market's initial expectation of about 22% at the start of the quarter, with the beat rate also at a historical high.

However, behind the impressive numbers, the profit structure is changing. Goldman Sachs' breakdown reveals that of the S&P 500's Q2 EPS growth, approximately 19 percentage points came from "other income" of Alphabet and Amazon, mainly unrealized gains on equity investments, rather than growth in core business profits.

After excluding these non-operating gains, the S&P 500's Q2 year-over-year EPS growth rate still reached about 26%, indicating that corporate fundamentals were not distorted. However, at the same time, US stock profits are becoming increasingly dependent on a few AI-benefiting companies. Hyperscale technology companies continue to expand capital expenditures and have begun to rely on debt and equity financing to support AI infrastructure investments.

In other words, the core issue of this earnings season is not "whether profits have grown," but "where the growth comes from and whether it can be sustained."

45% EPS Growth, Nearly Half from Investment Income

The most watched data point this quarter was the 45% year-over-year EPS growth of the S&P 500 in Q2. This growth rate significantly exceeded previous market expectations, but Goldman Sachs analysis points out that a significant portion came from the "other income" item.

Data shows that Alphabet and Amazon contributed about 19 percentage points to EPS growth in Q2, mainly from unrealized gains generated by held equity investments; Microsoft also contributed about $3 billion in other income. Among them, Alphabet's other income for the single quarter was about $98 billion, and Amazon's was about $53 billion, mainly from the rise in value of equity investments in private companies.

After excluding these factors, the S&P 500's Q2 year-over-year EPS growth rate was about 26%. Although significantly lower than the surface growth rate of 45%, it remains one of the fastest growth rates since 2021.

This means that US stock profits are not entirely reliant on accounting gains to "beautify" results, but the quality of earnings is changing: investment income is becoming an important component of profits for large technology companies. Data shows that in Q2 2026, the proportion of "other income" to GAAP profits for mega-cap technology companies rose to 61%, significantly higher than levels in many past years.

The Better the Earnings Report, the Less Market Reward

If earnings figures remain strong, the market reaction has changed.

As of July 31, 61% of S&P 500 companies had announced their Q2 results, covering about 66% of the index's market capitalization. About 64% of these companies beat market EPS expectations by at least one standard deviation, a ratio close to historical highs. However, the stock price increase brought by beating earnings expectations was significantly weaker than in the past.

Goldman Sachs data shows that historically, S&P 500 companies outperformed the index by an average of about 95 basis points on the trading day following an EPS beat. In this quarter, however, TMT companies, even when beating earnings expectations, underperformed the S&P 500 by an average of about 192 basis points the next day.

In contrast, non-TMT companies recorded an average positive excess return of about 75 basis points the next day after beating earnings expectations. The market is sending a signal: For AI leading companies, investors have already priced in high growth expectations, and simple earnings beats are no longer sufficient to drive further stock price increases.

AI Is Reshaping the US Stock Profit Landscape

Current US stock profit growth is increasingly concentrated in the AI industry chain. Goldman Sachs data shows that AI infrastructure-related companies contributed about 1/3 of the S&P 500's Q2 EPS growth; looking ahead to the second half of 2026 and 2027, this sector is expected to contribute more than half of the profit increment.

From the perspective of company contributions, Alphabet contributed about 28% of the S&P 500's Q2 EPS growth, Amazon about 16%, Micron about 10%, and Nvidia is expected to contribute about 9%. The top ten contributing companies accounted for about 79% of the profit growth. This means that the overall profit performance of the S&P 500 is becoming increasingly dependent on a few AI infrastructure beneficiaries.

For index investors, profit growth remains strong; but for market structure, increased profit concentration means risk is also more concentrated.

AI Spending Surge, Cash Flow Under Pressure

Another change worth noting in the earnings season is the capital expenditure pressure on hyperscale technology companies. Alphabet, Amazon, and Microsoft saw cloud business revenue grow by 48% year-over-year in Q2, a significant acceleration from the 39% growth in Q1, as AI demand is translating into cloud computing growth.

But to compete for advantages in AI infrastructure, corporate capital expenditure has also expanded rapidly. The aforementioned hyperscale technology companies had combined capital expenditures of $182 billion in Q2, while free cash flow for the same period was only about $5 billion. The funding gap is forcing companies to rely more on external financing. In Q2, these companies issued about $51 billion in bonds and completed about $50 billion in equity financing.

Goldman Sachs expects that hyperscale technology companies' capital expenditures in 2027 will exceed $1 trillion, a year-over-year increase of about 33%, a significant upward revision from earlier forecasts. As the AI investment cycle continues, tech giants may need to continuously enter the financing market. Goldman Sachs' credit team expects that these companies may issue about $400 billion in investment-grade bonds in 2027.

Profit growth driven by AI is continuing, but whether capital expenditures can translate into sufficient returns will become a key focus for the market in the future.

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