Alphabet makes more in interest income than most S&P 500 companies earn in total

It’s hard to overstate the earnings power of Big Tech. After all, that’s how you get to be Big Tech (outside of Tesla, I suppose).

These companies’ immense profitability is directly linked to the dominant positions they have in industries that are either huge to begin with or growing faster than the rest of the economy. Think things like Alphabet’s search, Apple’s phones, or Amazon’s web services.

What might not be very well appreciated is how profits produced through that industry leadership have a flywheel effect. Besides giving money back to shareholders, engaging in M&A activity, or trying to create the Next Big Thing, tech giants can also make stacks of cash just by investing their retained earnings – typically in short-term US Treasuries or corporate bonds.

One highlight from Alphabet’s latest quarterly report is that the company made over $1 billion in net interest income for the three months ending in June.

397 companies in the S&P 500 didn’t make that much in total net income in their most recent quarter – a group that includes firms like Target, Starbucks, Advanced Micro Devices, Marriott, and Blackstone.

And if we strip out the ones that posted net losses (since these can be driven by extenuating circumstances like acquisitions), Alphabet still made more in interest than the bottom 30 earners in the S&P 500 made in total profits combined!

Alphabet’s net interest income has more than doubled over the past three years, while its net income is up less than 30% over the same period.

Obviously, the Federal Reserve’s fingerprints are all over this. It’s easier to sit around and make money doing nothing when you get paid more for sitting around, having money in short-term fixed income securities, and clipping coupons.

Interest rates are typically thought of as a tool of macroeconomic stabilization: turn the dial up, economy goes down; turn the dial down, the economy goes up. But this exercise helps reinforce that interest rates can have distributional consequences that can be far more momentous than any “headline” impacts that show up in things like GDP growth.

This is true both in the household and corporate sectors. Weaker companies tend to have more floating-rate debt and are exposed to higher interest costs as rates rise, while the stronger companies…well, see above. People who are less-well off tend to have more debt; richer people tend to own more interest-bearing assets. 

This phenomenon is also a reminder of how flimsy and volatile our narratives around price action can be (including, in all likelihood, ones espoused here). Back in 2018, when the 10-year Treasury yield surged above 3% (how quaint!), the Nasdaq 100 materially underperformed the S&P 500 during the accompanying market downturn. The thinking was, in part, that richly valued megacap firms were more exposed to a valuation reset brought about by higher rates.

Snap back to the present day, and Big Tech is raking in billions on higher rates and we’re looking primarily for lower borrowing costs to put a floor under more cyclical parts of the economy.

It’s markets. We’re all trying to put together a puzzle whose pieces change in shape and size every few weeks, and we never got the picture on the front of the box showing what it’s supposed to be anyway.