Three-Line Briefing
- S&P 500 companies' combined net profit for the second quarter (April-June) rose 52% year-on-year.
- Excluding unrealized valuation gains on stock holdings and equity stakes, the growth rate falls to 33%.
- The 19-percentage-point gap between 52% and 33% stems from an accounting effect in which stock-market gains flow straight into the net profit line.
What's Changing
The headline of this earnings season is that S&P 500 net profit rose 52%, but the figure investors should actually be watching is 33%. The remaining 19 percentage points didn't come from companies selling more or protecting margins—they're unrealized gains booked to the net profit line as the value of the equity holdings companies own has risen. In other words, a significant portion of the earnings surprise the market is currently pricing in is actually the result of the stock market's own rally feeding back into net profit.
Accounting rules are what create this illusion. Starting in 2018, U.S. accounting standards (ASU 2016-01) began requiring companies to reflect quarter-to-quarter changes in the market value of publicly traded equity investments directly in net profit. In the past, unrealized gains and losses didn't show up in net profit until the stock was sold, but now, simply holding shares means a company's net profit rises whenever the stock market climbs. This effect is most pronounced at insurers and investment holding companies that hold large equity portfolios.
The picture sharpens further when tied to interest rates. When expectations of rate cuts push up valuation multiples across the broader stock market, those higher share prices flow back into the net profit of companies with heavy equity stakes, which in turn gets cited as evidence of stronger earnings. Unless one separates what the market has already priced in (valuation re-rating driven by rate expectations) from what it hasn't (the 33% figure reflecting actual operating strength), it's easy to misread this feedback loop as genuine earnings improvement.
Numbers in Context
Both the 52% and 33% figures are year-on-year growth rates, tallied in August as the earnings season entered its final stretch. A 19-percentage-point gap is not a trivial amount on an aggregate, index-wide basis. At the individual-stock level, the effect is negligible for manufacturers and consumer companies with little equity investment exposure, but because large insurers and holding companies carry substantial weight in the index's combined net profit, the accounting effect at a handful of companies appears to have lifted the index's overall headline growth rate.
Stocks (Tickers) to Watch
- Large insurers and investment holding companies: Mark-to-market gains on their equity portfolios flow directly into net profit, making their headline earnings stand out—but by the same logic, net profit could shrink quickly if the stock market turns lower.
- Companies that generated profit through genuine revenue and margin expansion: Companies within the "pure growth" 33% bracket may be relatively undervalued amid the accounting-illusion debate and could see re-rating.
- Passive index-tracking funds: Money that flowed in based solely on the 52% headline, judging valuations to be cheap, is exposed to reversal risk once the actual 33% growth rate becomes clear.
- Financial-sector companies that have expanded equity investment exposure during the high-rate period: If expectations for rate cuts recede, a stock-market pullback combined with the same accounting mechanism working in reverse could increase earnings volatility.
Risk Check
- Unrealized equity gains inflate net profit only while the stock market is rising; once the market turns lower, the same accounting rule works to reduce net profit.
- Applying the 52% headline growth rate directly to forward twelve-month P/E calculations creates the illusion that valuations are cheaper than they actually are.
- Even the adjusted 33% growth rate remains solidly in the high-double-digit range year-on-year, so it's premature to call this gap a sign of an earnings slowdown.
- Equity investment exposure varies widely by industry sector, so judging individual stock (ticker) valuations from index-wide figures alone can produce significant errors.
Bottom Line
The S&P 500's 52% second-quarter net profit growth is a blend of 33% genuine operating improvement and a 19-percentage-point accounting illusion—favorable while the stock market keeps rising, but capable of eroding headline earnings quickly in reverse once a correction hits.
FAQ
Exactly how much did S&P 500 second-quarter net profit rise?
Based on second-quarter (April-June) earnings-season tallies, S&P 500 companies' combined net profit rose 52% year-on-year. However, excluding unrealized valuation gains on stock holdings and equity stakes, the growth rate falls to 33%.
Why are unrealized equity gains included in net profit?
Because U.S. accounting standards (ASU 2016-01), in effect since 2018, require companies to reflect quarter-to-quarter changes in the market value of publicly traded equity investments directly in net profit. Even without selling shares, a rise in the stock market gets booked as an unrealized gain on holdings within that quarter's net profit.
Will this accounting-driven illusion repeat next quarter?
If the stock market keeps rising, the same effect is likely to continue, with headline net profit running higher than actual operating performance. Conversely, if the stock market undergoes a correction, the same rule would pull net profit down, potentially flipping the sign of the gap seen this time.
This article was automatically summarized and analyzed based on the original news report. View original (Yonhap News Securities)
