S&P 500 First-Quarter Earnings Growth Fastest Since 2021, But Details Hide 'Foam'

The first quarter of US stock market earnings has concluded with impressive numbers, but this report card may not be as solid as it appears on the surface. FactSet data shows that the first quarter earnings per share (EPS) for the S&P 500 constituents reached $80.75, a year-over-year increase of 28.4%, marking the fastest growth rate since 2021—when the economy was restarting from pandemic lockdowns and low base effects led to a significant rebound in corporate profits. Robust earnings data has provided support for the stock market's continued climb under the shadow of the Iran war, with the S&P 500 having risen by about 9% since the outbreak of conflict at the end of February, hovering near historical highs. However, the three companies that contributed the most to this round of earnings growth—Alphabet, Amazon, and Meta—all had a significant portion of their profits from one-time gains outside of their core businesses. Alphabet’s first-quarter profits included $37.7 billion in non-operating income, mainly from the paper appreciation of the equity stakes it holds. Alphabet did not disclose specific investment targets, but it is known that it is an investor in Anthropic. Amazon, on the other hand, explicitly disclosed that its investment in Anthropic brought in $16.8 billion in accounting gains, which became an important source of its first-quarter profits. Meta also received a $8 billion non-operating tax benefit from a Treasury ruling. These numbers are not negligible: Meta's tax incentives are comparable to Costco's net profits for the entire year of 2025; Alphabet's non-operating income exceeds Walmart's net profits for the previous year; Amazon's Anthropic gains surpass Goldman Sachs' annual profits for 2025. The key issue is that these gains are paper profits, not actual cash realized. Once AI asset valuations experience a substantial correction, these paper gains could reverse just as quickly and transmit to a broader equity market.