Corporate Profits Are Booming. Can the Good Times Last?

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Corporate America is having a very good year. S&P 500 earnings per share jumped 53% in Q2 from a year earlier, while sales rose nearly 16%, according to LSEG data.

What’s driving the profits? Sarah Nassauer and Theo Francis from The Wall Street Journal explain:

• AI investment. Companies continue to pour huge amounts of money into AI, helping support economic activity and corporate earnings.
• Consumers keep spending. Retailers, including Target, Best Buy, and Dollar General reported stronger sales, helped in part by a strong stock market and high home values supporting spending among wealthier consumers.

• A tariff-refund windfall helped some (some companies are passing the money on through lower prices, while others are seeing it flow primarily to their bottom lines).

Our take? There are cracks beneath the optimism. For one, one-time investment gains at Amazon and Alphabet helped inflate that figure (though, to be fair, even without them, earnings grew at their fastest pace since 2021). If we turn to a different data point, FactSet data found that the S&P 500 had a blended (actual earnings reported plus estimates for the small companies that have not yet reported) earnings growth rate of 52%. And yet if we stripped out Amazon and Alphabet, that number would fall to 33.8%. Energy earnings are up roughly 146% year-over-year, thanks in part to high fuel prices. Communication Services is up about 117%, largely driven by Alphabet’s $98 billion in unrealized investment gains. Outside of those numbers, consumer confidence is weakening. And much of the current economic momentum depends on the AI investment boom continuing. If that spending slows, the outlook could look very different.

Take a step back and imagine a household that had a spectacular year: Mike and Carol (or Georgie and Maddie, if you prefer) to big tax refund. Their house appraised higher. Their brother-in-law finally paid back a loan from 2019. And the guy next door hired one of them to help build his addition.

Every dollar is real. But none of them got a pay raise.

That’s Corporate America’s quarter. The tariff refunds are a one-time government check. The gains from Amazon and Alphabet are paper gains on investments, not products sold to customers. The energy windfall comes from expensive oil, which is a cost to nearly every other company in the index, and is helping push interest rates to their highest level since 2008. And the AI spending “supporting earnings” is largely companies buying from each other, which means the same dollar gets counted as good news at three different stops along the way.

Strip all of that out, and what’s left is still genuinely good. Just ordinary-good, not 53%-good.

Why does the distinction matter more than it sounds? Because markets don’t price companies on what they earned. They price them based on what investors think they’ll keep earning. A number built from refunds, appraisals, and a favor from the neighbors sets an expectation nobody can meet twice.

The party isn’t over. But somebody should check who’s actually paying for the drinks.