Carson Investment Research warns that Alphabet Inc.’s second-quarter earnings per share (EPS) surge significantly distorted broader market metrics, adding 12 percentage points to the S&P 500’s headline EPS growth of 37.9%. The tech giant’s reported results were heavily influenced by non-operating items, specifically roughly $98 billion in unrealized net investment gains on private equity securities, which contributed $6.26 per share to the bottom line.

According to analyst Harry McDonald, Alphabet accounted for 92% of the net dollar-level increase in S&P 500 earnings over a five-trading-day period. This concentration risk means that stripping out Alphabet reveals a more moderate underlying trend: blended earnings growth for the remaining index constituents stands at 25.9%, down from the headline 37.9%.

Core Operations vs. Investment Gains

While Alphabet reported a headline GAAP EPS of $9.11 against a consensus estimate of $2.88—a 216% beat—Carson urges investors to scrutinize the composition of this figure. The company’s income from core operations fell to $14 billion, a significant decline from $25.5 billion in the same quarter a year ago.

Excluding the revaluation gain, Alphabet earned $2.85 per share, effectively missing consensus estimates when viewed on an operating basis. McDonald noted that he prefers building a view on the $14 billion reflecting operating earnings rather than the $112 billion total that includes revaluation gains.

Market Implications and Risks

Carson warned that portfolio revaluations provide "nothing about whether the underlying business is compounding." McDonald added that private marks inflating reported earnings on the way up could become a drag on the way down, introducing volatility unrelated to operational performance. Despite these caveats, Carson concluded that a 25.9% ex-Alphabet growth rate remains "an excellent quarter," indicating that broad market earnings strength is intact beneath the headline numbers.

What the Numbers Show

The divergence between Alphabet’s headline EPS beat and its declining core operating income highlights a structural shift in how large-cap tech firms contribute to index returns. With 92% of the net dollar-level earnings increase in the S&P 500 attributable to a single entity over five days, the index’s resilience appears heavily dependent on asset revaluation rather than uniform operational expansion across sectors. Investors relying on headline EPS figures may overestimate the breadth of corporate profitability if they do not adjust for such one-time or non-cash investment gains.

Wall Street investors have fundamentally altered how they evaluate major technology stocks, shifting their primary focus from traditional metrics like revenue and earnings to capital expenditures (capex). This change reflects the intense competition among hyperscalers to build artificial intelligence infrastructure, with Alphabet Inc., Microsoft Corp., Amazon.com Inc., and Meta Platforms Inc. leading the charge. The immediate consequence of this spending spree is visible in Alphabet’s latest results, where quarterly free cash flow turned negative for the first time in company history due to $44 billion in capex during the quarter.

Alphabet’s total capex over the past 12 months reached $132 billion, roughly double the level of a year earlier. Management has guided for approximately $200 billion in capex over the next 12 months, signaling that the investment cycle is accelerating rather than slowing. This willingness to sacrifice current cash generation for future computing capacity defines the current market dynamic, forcing investors to look beyond immediate profitability to assess long-term AI dominance.

The scale of this spending is unprecedented across the sector. Over the past twelve months, the five largest hyperscalers—Alphabet, Amazon, Meta, Microsoft, and Oracle Corp.—along with Space Exploration Technologies Corp., invested a combined $539 billion in capital expenditures. Consensus estimates suggest this figure will surge to nearly $800 billion over the current fiscal year, exceed $1 trillion the following year, and approach $1.33 trillion annually within five years.

Hyperscaler AI Capex Tracker

Microsoft and Meta are next in line to report earnings that could further validate this trend. Microsoft spent approximately $97.2 billion over the last twelve months, with analysts expecting capex to climb to $118.9 billion over the next fiscal year, a 22% year-over-year increase. Meta’s trajectory is steeper, with spending expected to jump 79% to $135.2 billion over the next twelve months after investing about $75.8 billion in the past year.

What the Numbers Show

The data reveals a divergence between short-term cash generation and long-term infrastructure buildup. While Alphabet’s free cash flow turned negative, the broader group is projected to maintain significant growth in capex through FY3E before moderating in later years. SpaceX shows the highest five-year compound annual growth rate at 55.2%, indicating aggressive expansion plans compared to the more mature trajectories of Alphabet and Amazon. Investors are increasingly likely to prioritize these capex figures over advertising growth or cloud revenue when assessing valuation.