Quick overview

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Goldman Sachs has discovered an issue concealed within an exceptionally strong earnings report.  S&P 500 companies reported an impressive Q1 earnings figure, with growth approaching 25%. Goldman Sachs, however, claimed that investment gains at Google parent Alphabet (GOOGL) and Amazon (AMZN) contributed to the figure. If you eliminate those gains, the result will be much less impressive.

Amazon’s pre-tax gain of $16.8 billion, recorded in non-operating income, was attributable to its investment in the AI bellwether Anthropic. As a result, its net income increased to $30.3 billion, once again significantly exceeding Wall Street projections.

Alphabet’s gain was even greater with $37.7 billion in other income, primarily from unrealized gains on non-marketable securities, resulting in an 81 percent increase in net income to $62.6 billion and an 82 percent increase in EPS to $5.11. Investors use earnings headlines as a crucial indicator of whether corporate profits are sustainable and stock prices are overbought.

Amazon and Alphabet have a significant impact on the figures due to their enormous market capitalizations, which give them disproportionate weight in the S&P 500 index. In essence, the market is obviously much more concentrated than the headline implies, even though it may still be expanding.

Net sales at Amazon increased 17% to $181.5 billion in the first quarter. Sales of Amazon Web Services increased by 28% to $37.6 billion, the company’s fastest growth in 15 quarters.

According to Goldman Sachs, investors should look past the corporate earnings headline figure. At about 25%, the S&P 500’s Q1 earnings growth appears to be exceptionally strong on the surface. Additionally, the fact that investors are already paying higher prices for stocks is a sign of a better future for Corporate America.

However, Goldman’s research team notes that rather than the index’s outstanding operating performance, a significant portion of those gains comes from investment-related activity by two major tech giants, Amazon and Alphabet. These two companies have a significant impact on the S&P 500, which Goldman refers to as a “distortion” in the overall earnings picture. The underlying S&P 500 earnings growth falls to 16% if we exclude those investment gains.

Although that figure is respectable, it is obviously not the same as a 25% growth rate. Therefore, the market is much more concentrated than the headline figures indicate, even though it may still have bottom-line momentum.