Alphabet and Amazon Are Cheaper Than the S&P 500. What's Going On?

Insight summary

• •Alphabet and Amazon have price-to-earnings (P/E) ratios of 17 and 20.9, respectively, compared to the S&P 500's 24.2, making them appear cheaper at face value.
• •The lower P/E ratios are influenced by one-time gains from investment holdings, notably in AI firm Anthropic and SpaceX for Alphabet.
• •Alphabet reported $98 billion in 'other income' in Q2 primarily from these investment gains.
• •Accounting standards require recognizing unrealized investment gains as earnings, inflating EPS and thus skewing the P/E ratio.
• •Despite these inflated earnings, Amazon and Alphabet are still considered solid investment opportunities.
• •Anthropic is expected to go public soon with a target valuation of $2 trillion, impacting the valuations of these tech giants.
• •These factors create an appearance of value that investors should analyze carefully before concluding they are undervalued stocks.