Last week I highlighted how mark-to-market (MTM) gains could distort headline growth rates, with Alphabet’s (GOOGL) latest results illustrating exactly why.
Alphabet’s $98 billion unrealised MTM gain on its equity securities portfolio (including holdings such as Anthropic) significantly inflated headline EPS. Excluding this one-off gain, S&P 500 Q2 earnings growth falls from 38.8% to 27.0%, while Communication Services drops from +112.1% to just +9.3%.
The largest known unknown remains the return on hyperscaler AI capex, with Alphabet’s heavy investment contributing to negative free cash flow (-$5.8 billion) for the first time ever.
Changes in earnings quality are not always obvious from headline results but can be tracked using our StarMine Earnings Quality alpha model. For Alphabet, the model has trended lower over the past two years and now stands at 49 (1 = bearish, 100 = bullish), with the latest deterioration driven by two of its four components: higher accruals (a lower-quality source of earnings) and weaker cash flow (a higher-quality source of earnings).
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