Cross-ownership valuations inflate S&P 500 earnings
The guest argued that cross-ownership among AI companies creates massive paper gains that artificially boost S&P 500 earnings, keeping index valuations from looking excessively expensive.
The argument
The speaker noted that S&P 500 earnings grew 27% year-over-year, but removing the mark-to-market gains from Anthropic's valuation surge reduces that growth to 17%. This dynamic allows major investors like Microsoft and Amazon to report substantial 'other income' gains, which could continue as private valuations rise.
The thesis, stress-tested
✓ What validates it
- ✓Anthropic successfully closes its next funding round at a higher valuation
- ✓Microsoft and Amazon report continued high 'other income' in upcoming quarterly earnings
▸ Risks discussed
- ▸Valuations are highly dependent on private funding rounds which can fluctuate
- ▸Paper gains do not represent actual cash flow or operating revenue
Hear it yourself
"So I do think you're right that it will start to flow through and hit the stock market. But, and the big but is, the stuff that is immune to this, and that is the AI tech chips trade, that could continue to go up. And so we could continue to have a situation where look at a stock. Man, it looks terrible. Man, it looks terrible. Look at the index. It's making new highs because there's seven stocks, throw in another five that are basically holding up the whole thing because of the AI trade. And I would argue to you that when it comes to financial markets, we've been talking about oil."
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