Weekend at Alphabet’s
A record quarter, propped up and waving
As a thanks to my paid subscribers they received this article yesterday. After a day, it opens up for everybody else.
Somebody commented this line and asked what I thought of it:
“The S&P is above the record it set in January, on second-quarter earnings up something like 23% year over year.”
Two claims, one sentence. I’m going to take them in order, because I have a spreadsheet open and nothing better to do with my Tuesday.
The S&P 500 set its record on the second of June, at 7,620. Last night it closed at 7,413. That is about three percent underneath, in a year that has printed roughly two dozen record closes and not one of them in January.
That index is now on track for its first red July since 2014.
Gold’s all-time high was January, at $5,608. Silver’s was January, at $121. The HUI topped in January at 986. They now sit 28%, 52% and 40% below those prints.
January was an enormous record month.
For everything that No1 wants to own.
FactSet had blended Q2 earnings growth at 23.2% when the quarter shut on June 30. A fortnight later: 24.8%. Then last Friday it printed 37.9%, the fattest year-on-year number since Q3 2021.
Fourteen points of earnings growth on the entire American stock market, arriving inside a single week. NOT a sector. NOT a company. The entire frickin’ “market”!
You would be optimistic for far less!
Alphabet did $119.8 billion of revenue, up 24%, and $40.8 billion of operating income at a 34% margin. Cloud up 82%. Perfectly respectable quarter.
Then you get below the operating line. Other income: a net gain of $98.0 billion, “primarily the result of net unrealized gains on our equity securities”. Tax takes $21.9 billion of it and the remaining $77.1 billion walks into net income.
Which is how $40.8 billion of operating income turns into $112.1 billion of profit, up 298%, with $6.26 of the $9.11 a share arriving from something nobody at Alphabet had to do.
And if you didn’t get this the first time around, don’t worry, I also had to read that five times before I fully grasped it. IANAA!
Now about this “other income”. That’s the interesting one. For comparison: Q2’25 was $2.66B.
$98.753B is “unrealised paper gains” and $278M was money that actually moved. Don’t you love financialisation?!
Alphabet owns a bunch of stocks in other small and mostly insignificant companies that absolutely have not much free float but are part of the Nasdaq index nevertheless. Names like SpaceX. And then there’s that one tastefully unnamed private company.
So because those prices went up, they booked the difference as “profit”.
Everybody knows the unnamed one is Anthropic. Alphabet won’t say it, much like any dabbler in the ways of magic won’t say Voldemort.
And yeah, this part I can report with a bit of glee: $21.9 billion of that gain went out as cash. You can book a rocket at whatever fictional price you like, but the tax man always gets his due.
Real, hard cash, wired-to-the-Treasury cash, levied on money that does not exist even yet.
Monopoly money.
Real tax bill.
Why am I dwelling on this number? Well… From this number, everything else rolls uphill. The S&P 500’s blended net profit margin for Q2 is 15.7%, the highest in the whole history of the series going back to 2009.
Take Alphabet out and it’s 14.4%.
Take Alphabet out and that 37.9% growth rate becomes 25.9%.
Remember that this is THE most profitable quarter in the recorded history of American corporate margins?
Yup. I’m sure it’s fine that it’s a mark-up on a private valuation.
So let’s boldly go where no accountant has gone before and look at that asset.
On the day of our Lord June 12 2026, SpaceX listed at $135, valuing it at ~$1.75 trillion. LARGEST IPO in history, 30% retail allocation, demand reportedly somewhere around $150 billion. It ran to a $2.6 trillion market cap. The sky wasn’t the limit anymore! The stars were.
Then it buckled over, and on the fifteenth of July it went straight through its own IPO price, which is quite an achievement only one month in your public life.
Last night it was near $113. Down about 48% from its high. Silver’s even better. Oh well… Who am I kidding, No1 needs silver to launch high-precision electronics into space…
Alphabet marked its shares to market the 30th of June. It published that mark on the 22nd of July.
Anyone with a browser could watch that if you reach for the stars, there’s a hell of a lot of space (yea yea, intended) to fall.
You know, there’s this scene in Weekend at Bernie’s where the two lads waggle the dead man’s arm at the party guests so nobody clocks that he’s gone.
THAT resembles Q2 earnings season pretty well.
Somebody’s waggling the arm, everybody’s applauding, and the all-time margin record going up on the wall behind them.
In all fairness to Alphabet, they did warn you, because somewhere in that same document they buried this: “fluctuations in the value of these investments “could significantly contribute to the volatility of OI&E in future periods””. (/snicker)
So yeah, both the headline and the disclaimer served on a platter for you to read. I’m letting you guess what headline they ran with…
But wait for it… It gets better!
As I mentioned before (see links above), the S&P Dow Jones Indices rejected its own proposal to fast-track megacap IPOs into the index. Twelve-month seasoning stays. GAAP profitability requirement stays.
Which means SpaceX is ineligible for the S&P 500 until mid-2027 at the earliest, on the pesky little requirement that as a company you should make money. Annoying right?
Funny thing…
Remember Google?
I think I mentioned it before…
Not too long ago…
………. wait for it
………. wait for it
The SINGLE largest contributor to the S&P 500’s record profit margin this quarter is SpaceX.
Funny how that works, right?
They were not profitable enough (ok, ok, not profitable at all) so they couldn’t walk through the front door. So why not walk in through accounts payable?
The S&P committee did everything right and it made no difference whatsoever, because you don’t need to be in an index to move it. You only need to be owned by something that is. Ocean’s Eleven, except the crew are auditors and nobody had to run.
The Nasdaq, as you’re well aware of, waved it straight through.
Fifteen trading days after listing, under the rule change written for exactly this occasion - see more details in the 2 articles linked above - QQQ alone was forced to buy around $4.3 billion of it, and up to $27 billion across every Nasdaq-100 and Russell tracker on earth, against a public float of three to five percent.
97% of a company behind velvet rope, and the price of this 3% left-over is what the world’s pension money gets charged.
Now in about a week from now - August 6 - two days after SpaceX reports, 20% of insider shares come unlocked.
Meanwhile the Nasdaq Composite topped on the first of June at 27,086.81, having taken 27,000 for the first time ever, with the Nasdaq 100 clearing 30,000 the following day. Last night the Composite closed at 24,932. 8% off the high, with the momentum basket inside it down 24% in July alone.
To infinity and beyond! With a whimper, a backslide and a rebound? I guess?
Well, back to ABC - erhm Alphabet, stupid name, I prefer good ol’ Google - they reported for the first time since their 2004 IPO a negative $5.855 billion free cash flow.
Capex came at $44.9 billion in three months and full-year guidance went up to $195-205 billion, against roughly $91 billion for the whole of last year.
Max Bialystock would have wept with pride.
I have been beating this horse since like forever (see links above) and by now it’s more like a paste, but the numbers keep obliging, so what can I do?
Capex doubles, cash goes negative, profit sets an all-time record. I’m pretty sure somewhere a first-year accounting student is being rewarded for proposing precisely this.
Korea.
Korea…
Why Korea?
Well… Korea has already screened this film and No1 sat through the credits.
The KOSPI hit 9,385 on June 19, THE BEST-PERFORMING MAJOR INDEX ON THE PLANET - yes yes, all caps because this time it’s TRULY different! - up about 90% year-to-date.
Samsung Electronics and SK Hynix, the Mag2, were over half the entire national index by then, up from about a quarter at the end of last year.
Right now the KOSPI is hanging on by a thread at 6,000, down about 36% from that June print.
SK Hynix is ~50% off its high, Samsung 40.
Roughly 1.2 million retail people got margin-called, and 320,000 accounts closed out entirely.
The country that gave the world a television programme about desperate debtors gambling for a jackpot has just margin-called one adult in thirty. SK Group’s chairman went on the record on the seventeenth to characterise it as a normal correction after expectations had become “excessively elevated”.
“Excessively elevated”. I’m going to borrow that one a few times for sure.
Now what has Korea and the KOSPI to do with Google erhm Alphabet?
Well the former is basically the latter with the packaging stripped off.
In Korea you have ?had? the Mag2, in the US you have the Mag7. You have leverage at both sides - which I reckon is now a bit less now in the former.
Korea went from ATH into a bear market in about two sessions and it is still going down (full disclosure: I am still short Korea). Bloomberg says there’s a sixty-day correlation between the KOSPI and the Nasdaq 100. They said that when it’s climbing. Didn’t hear it lately, which is kind of peculiar. Or worrying.
Every element of that setup exists in the US too. But of course, the US does everything BIGGER and BETTER.
So… margin debt is at a record $1.5 trillion, up 49% in twelve months.
The top ten stocks are 43% of the S&P.
Put/call skew hit its lowest reading ever recorded this month, which means in normal English that crash insurance has never been cheaper, because No1 wants any.
Korea’s version of “this time it’s different” was launching single-stock leveraged ETFs on the two companies holding up the index. The US’s is booking a rocket’s paper valuation as national corporate profit.
And everything you’ve read till here is being printed on top of a fortnight of war.
War on, war off. War on, war off. I coined it the “Weekend War”.
Now we’re in the “let’s talk” phase again. But just the other day, we had 2 weeks of American airstrikes on Iran. Iran’s health ministry counted at least fifty dead and more than five hundred injured from strikes since the sixth of July, in that window alone.
A desalination plant went down and took the water supply for ten thousand people with it.
A bridge on the road between Roudan and Bandar Abbas.
A dozen American service members were killed - which I’m sure is downplayed by the gov. And God knows how many more are missing…?
But yey!, the bombing stopped.
Reuters has it that the President’s advisers told him they were running out of targets and needed some time to let Claude compile a list of new ones. So we’re back at the ceasefire phase. The US stopped, and Iran said an attack for an attack, so they stopped too. Until we get an updated list I guess?
This is now the fourth or fifth time this year the same sequence has run. And about the 40th time Trump declared victory.
Talks, memorandum, breach, bombardment, pause, talks.
Bill Murray woke up to the same radio alarm for however many years it was, but at least he eventually learned to play the piano.
I’m wondering when we will wake up.
Brent is now somewhere around $86.6, down about 6.7% on the week (so far), WTI not far behind, which still leaves crude up ~20% for the month with Hormuz traffic where it is.
The spice, technically, is still flowing.
Just along a lane Tehran approves of, at whatever toll it feels like charging.
If you’ve been here for a while, you probably know where I stand: oil is still stuck in the Gulf. SPR is drawing down hard. Operational limits are in reach. And while I was writing this, I just saw that Libyan oil and gas were briefly halted due to ‘civil unrest’. So yeah, it’s only normal that the price of oil goes down…
The US needs to refinance about 30% of their debt, THIS year alone. AI needs a lot of money for fast depreciating GPUs and their companies are not profitable (hence Nvidia is bankrolling the whole AI space - I’m sure it’s purely selfless and not to collapse the house of cards).
And the last few weeks, stocks started trembling.
In about a week from now, the biggest IPO of our times (or of ANY time for that matter), these locked-up shares can get sold.
I’m not saying it’ll crash tomorrow. Not even the day after. But maybe in a week we’ll see some real fireworks.
Stay safe out there!
My other publications:
[Daily Digest] → The news in 5 minutes, without the forty open tabs.
[Portfolio] → What I do with my own money
PS: for those waiting for a gold/silver article: I had been working on that one, but news is going so quickly, I can’t get it out in a coherent fashion. But I owe you that one.
Fun project for someone, add up all the Goodwill/Intangible assets of the Fortune 500 and divide by total assets. Then add up all the retained earnings of the same companies. I wonder what the results would be.
Goodwill is where, when you over pay for anything, fake or real, during the acquisitions, they make great reasons and create billion dollar valuable spreadsheets to dump the excess paid, amortization and depreciation can be a biggie but hey we will exclude it. It is where the future billion $$ write off occur just one time promise.
Retained Earnings is the bucket where, when everything is said and done for the year gets dumped. It's where all the **** from the income statement gets dumped after the year including depreciation, amortization, interest, taxes and a few other necessary business expenses that they don't like to pay so they exclude them from net income. Just like the door dashers of the world like to ignore, the true cost of operating their vehicles.
I was a contract forensic accountant for a high tech data cloud company in 2015. Our job was to scrub the **** out of the balance sheet and fix it, which required a lot of write offs, one time of course:-). I was amazed at the dog piles that laid everywhere and that was a publicly traded company. Private Credit and everything AI related has to have some many piles around every corner; I bet it smells really bad. Oh, I forgot they don't have to show their books until after the deal is done from what I have heard, requests to see them are routinely denied. Why? because they can.
Report long term wins exclude long term loss, a winning formula, until everyone realizes that every company on earth has to ultimately play with just one formula: assets=liabilities+owners equity. Nothing in history will change that formula. US.gov has a different set of rules, brrrrrrrr print, create digital currency for the excessive sponge.
That Alphabet profit claim is the first good argument I've seen in favor of taxing unrealised profits.
And before anyone gets their panties in a twist, most of you already get taxed on unrealised profits through your property tax. On the most damaging thing possible, a primary residence. But you gotta keep the wealth pump working on those proles... /S
We really don't hate clown world enough!