Over the past year, we’ve red-flagged the skyrocketing off-balance sheet debt funding the AI bubble. Last week, we showed the cost of this hidden debt knocks 9% off the earnings for the entire S&P 500 and as much as 80% off the earnings for individual companies.
Today, we share another fake source of earnings growth. Unrealized gains on investments, driven by the soaring valuations of OpenAI and Anthropic, are boosting earnings for the largest names in the market. Soaring valuations increase earnings, even if the actual operations of the business don’t improve.
What if the AI valuations level off or decline? Those paper gains turn into losses and reduce earnings. How much could S&P 500 earnings fall without the support of paper gains? How far could the index fall without the paper gains to support valuations?
The answers are below.
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