Earnings season reveals the mood of corporate America

Earnings reports are like report cards for American business, and they can tell us a lot about what the economy is doing and what it is expected to do. Alphabet reported disappointing earnings Tuesday: revenue growth has dropped – a big drop – 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 have beaten earnings expectations.

“I think the general impression of the reports has been positive,” said Alex Zukin, managing director of Wolfe Research. It’s a sight that makes people a little hesitant.

An outlook is the part of an earnings report where companies tell you what they think will happen. For example, Microsoft has suggested reducing demand for some of its products, Zukin said. Some red flags Zukin has seen are companies suddenly focusing on cutting costs.

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Are we making sure that every dollar we spend is spent the right way? he said. “These two things are often an ominous sign for the future demand environment.”

And there’s a big difference between companies that have bad reviews or bad earnings, and those that don’t.

“It depends on 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 well so far, and in fact, the outlook is very good for next year.”

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The job market is in good shape, so it’s no surprise that Payroll Processor ADP is hitting the payroll.

“On the other hand, if you sell to companies then you start to see a decline,” Walker said.

Google, Microsoft, and Texas Instruments each had disappointing estimates, and all three companies sell to businesses. It’s businesses that are starting to feel the teeth of rising interest rates – rising rates make borrowing more difficult and lower stock prices.

“It comes in waves,” said Joel Prakken, chief US economist with S&P Global Market Intelligence. For example, we have seen that the housing sector is the first to respond with a contract.

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After that, he says, business spending on goods will fall.

“Somewhere you’re going to see a decrease in spending on durable goods,” he said.

And all of this will start to show up in earnings reports over time.

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