On July 31, 2026, Amazon’s stock surged around 15% in a single session the day after it reported blowout Q2 earnings of $5.75 per share, shattering consensus analyst expectations of around $1.82. Makes sense, right? The company made way more money than predicted, and the market reacted by buying Amazon stock en masse, driving the share price up rapidly in the process.
For the average retail investor, those earnings could make Amazon’s stock sound like a bargain because its trailing 12-month price-to-earnings ratio (the most common metric used to determine how “cheap” or “expensive” a stock is compared to its peers) was still notably lower than the S&P 500 average, even after its price jump. What’s not to love?
This is where paper gains become important.
What are paper gains?
Paper gains refer to unrealized gains in a company’s assets, often in the form of stock holdings. Just like individual investors, companies buy, hold, and sell shares of other companies’ stock, and the value of those shares fluctuates over time. If a company holds stock, and that stock increases in value, that increase is called a paper gain so long as the stock isn’t sold because it increases the company’s income “on paper.”
Why are paper gains included in a company’s net income?
Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) require that companies include unrealized stock gains on their income statements as part of their net income, even though these gains haven’t been locked in via selling.
If Company A holds stock in Company B, and Company B shares go up in value, Company A has to report those unrealized gains as part of its net income when it shares its quarterly earnings report with investors.
And that’s exactly what happened with Amazon’s blowout Q2 2026 earnings. Let’s take a closer look.
Example of how paper gains can inflate earnings: Amazon
At $5.75 per share, Amazon’s net income (AKA profit — sort of) totaled $62.6 billion for the second quarter of 2026. What some investors may not realize, however, is that more than 85% of that net income isn’t real money. Amazon didn’t earn it by selling AWS compute (the company’s biggest profit driver) or delivering cat food and dish soap to consumers’ doors in its electric vans.
$53.4 billion of Amazon’s reported net income for the quarter actually came in the form of unrealized “paper” gains in the stocks it holds. In this case, the bulk of that stock was in Anthropic, a private large-language-model company that loses billions of dollars per year. Despite its heavy losses, however, Anthropic’s estimated valuation rose significantly over the course of the quarter, resulting in Amazon “raking in” billions of dollars of unrealized gains.
Adding to the murkiness is the fact that Amazon cannot simply turn this stock into cash by selling it like a normal investor could do with, say, their Coca-Cola shares if an unexpected expense came up. Amazon is very limited in its ability to sell its holdings in Anthropic for several reasons:
- Contractual obligations limit when and how much of the stock Amazon can sell.
- Anthropic is not (yet) publicly traded, so it has no market price and little liquidity, which makes selling shares difficult.
- Both companies are each other’s customers.
Should Anthropic fail, or should it go public and lose value, Amazon could experience a paper loss (the opposite of a paper gain), and its earnings could suffer as a result.
Were an investor to ignore these paper gains, which resulted from Amazon’s relatively illiquid shareholdings in a risky private company that doesn’t make money, Amazon’s Q2 earnings would be smaller — $9.2 billion, or $0.8526 per share. Using this number, Amazon’s P/E ratio jumps much higher than the S&P 500 average, and the stock no longer looks like as much of a bargain.
This is a particularly extreme example, but it demonstrates how influential paper gains — an increase in the value of a company’s stock portfolio, unrelated to its actual business operations — can be on a company’s earnings, and as a result, its P/E ratio.
Where can investors find a company’s paper gains?
Paper gains typically appear in a company’s income statement. In many cases, they are listed in a section titled something like “Unrealized gains and losses,” while in others, they are listed under a more vague heading like “Other income.”
Public companies include their quarterly income statements in their quarterly SEC filings, called 10-Q filings, and in their annual SEC filings, called 10-K filings. Investors can search for these forms through the SEC’s EDGAR database.
How can investors calculate a stock’s earnings without including paper gains?
To calculate a stock’s earnings (whether annual or quarterly) without including paper gains, an investor can subtract all unrealized gains (on a post-tax basis) from a company’s top-line net income number. The resulting number, divided by a company’s outstanding share count, produces an earnings-per-share value that does not account for paper gains.
Alternatively, investors can look at a company’s operating income, which typically includes only income generated by its operations and usually excludes paper gains. Operating income is usually also reported in a company’s income statement, which is included in quarterly and annual SEC filings.
