Earnings season reveals the mood of corporate America

Earnings reports are kind of like report cards for corporate America, and they can tell us a lot about what the economy is doing and expected to do. Alphabet reported disappointing earnings on Tuesday: revenue growth slowed – way down – from 41% last year to just 6% this year. On the other hand, payroll processor ADP reported higher earnings on Wednesday that surprised investors.

So far this earnings season, most S&P 500 companies that have reported earnings expectations have exceeded.

“I think the mood of the reports was generally positive,” said Alex Zukin, managing director at Wolfe Research. “It’s the attitude that’s making people a bit hesitant.”

The outlook is the part of the earnings report where companies tell you what they think is going to happen down the road. Microsoft, for example, suggested that demand for some of its products would accelerate, Zukin said. Some other red flags Zukin saw were companies suddenly focusing on cost cutting.

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“How can we make sure that every dollar we’re spending is being spent the right way?” he said. “Both of those things are generally a terrible sign for the demand environment going forward.”

And there is a significant difference between the companies that have negative forecasts or poor earnings, and those that don’t.

“It depends who you’re selling to,” said Michael Walker, an analyst at asset management firm AllianceBernstein. “If you’re selling to consumers or dealing with consumers and individuals, you’re doing pretty well so far and the outlook is actually good for next year.”

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The job market is in good shape, so it’s no surprise that Payroll processor ADP won earnings.

“On the flip side, if you’re selling to companies then you’re starting to see a downside,” Walker said.

Google, Microsoft, and Texas Instruments all had disappointing forecasts, and all three companies sell to businesses. Businesses are starting to feel the sting of rising interest rates – rising rates make borrowing more difficult and lower stock prices.

“It comes in waves,” said Joel Prakken, chief US economist at S&P Global Market Intelligence. “We have seen, for example, that the housing sector is the first sector to respond through contracts.”

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Next he says, business spending on equipment will fall.

“Somewhere in the mix you will see a drop in spending on consumer durables,” he said.

And all of that will start showing up in earnings reports as time goes on.

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