Tech giants like Amazon (AMZN-Q) and Alphabet (GOOGL-Q) have powered the stock market to record highs in recent years, fueled by the growth of their artificial intelligence and cloud computing businesses.
But in recent months, a big driver of those two companies’ profits came from an unusual source: the increasing value of their investment stakes in AI companies.
Over 70 per cent of Alphabet’s net quarterly income came from investments in other companies, and in particular, in Elon Musk’s SpaceX, according to a recent regulatory filing and analysis from Satori Insights, a financial markets research firm. SpaceX (SPCX-Q) went public in June in the biggest initial public offering ever.
Investment gains also accounted for roughly 65 per cent of Amazon’s net income, largely stemming from its stake in Anthropic, a leading AI startup that is also planning to go public.
Those gains underscore a growing vulnerability in the broader stock market: The companies that keep pushing the market higher are increasingly dependent on one another’s success.
“It’s circular,” said Matt King, founder of Satori Insights. “What’s funding AI is now increasingly more AI.”
Worries about the circular nature of the AI boom have persisted for some time as investors have watched the dominant tech giants, chipmakers and AI labs invest in or loan one another money. That money is often then used to buy products or cloud services from the same companies funding them.
AI executives have defended these circular financing models. Sam Altman, the CEO of OpenAI, has described the deals as a creative way to free up the capital needed to supercharge innovation at a time of rapid change.
But the investment gains at Alphabet and Amazon show how these companies’ fortunes are increasingly linked. They also point to the increasing interconnectedness of the stock market and the broader economy: AI is powering growth in both, making the threat of a stock market tumble an even greater concern for policymakers.
“The stock market was never just a reflection of the economy, but it’s now become one of the economy’s main engines,” King said.
Unrealized investment gains are added to a company’s profit for accounting purposes, according to the value of holdings at the end of each quarter. Unless the company sells any of the stakes, the gains are purely on paper. It also works in reverse: A decline in the value of investment holdings during a quarter can subtract from a company’s reported earnings.
Alphabet and Amazon did not respond to requests for comment.
They are part of a small group of closely watched technology companies, nicknamed the Magnificent 7, which also includes Microsoft (MSFT-Q), Meta (META-Q), Apple (AAPL-Q), Tesla (TSLA-Q) and Nvidia (NVDA-Q). This group has become a measure for the tech-driven stock market rally, and many investors like to look at the seven companies in aggregate.
Overall, the Magnificent 7 pulled in US$315.6-billion in net profit for the second quarter. That covers the three months through June for all of the companies except Nvidia, which has a slightly different financial year.
Of that total, US$134.6-billion, or about 42 per cent, came from investment gains, according to calculations made by King, who adjusted the companies’ reported numbers to account for taxes. Other sources of net profit are typically earnings from the sale of goods and services.
Without those investment gains, profits for this group would have been roughly equal to the previous quarter — not growing — according to King. Microsoft, Meta, Apple and Tesla did not report any comparable investment income.
Nvidia reported roughly US$13-billion in investment gains for its most recent quarter. The chipmaker has stakes in OpenAI and Anthropic, as well as investments in other AI-related companies, including CoreWeave and Applied Digital, which rent data-center access to high-powered processors for AI models.
The second-quarter investment gains for these seven companies were a much larger share of overall profits than the 5 per cent they totaled in the previous quarter, according to King’s calculations.
Going forward, investment gains on the tech companies’ holdings could continue to fluctuate as some of the private companies they are invested in go public.
The gains announced by Alphabet, which owns Google, appear to be largely attributable to its investment in Musk’s space and AI company SpaceX. It reported nearly US$80-billion in pretax profit stemming from investments in restricted equity securities and disclosed holdings of US$94.1-billion of SpaceX shares.
That gain is likely to change. When SpaceX started publicly trading June 12, its shares soared. Since then, the stock has gyrated wildly, and share price is now roughly 17 per cent below its level June 30, when Google reported its stake.
Amazon said in a regulatory filing that its US$50-billion investment gain came “primarily” from its stock in Anthropic.
If this interconnected AI boom begins to reverse — if, say, investors grow skeptical that AI will generate big enough profits to pay for the massive infrastructure build-out underway — it will have broad consequences, analysts and economists said.
“The AI trade is massively important to the U.S.,” said Ajay Rajadhyaksha, global chairman of research at Barclays. “We are more exposed to the AI trade unwinding as an economy than we were even a few years ago.”