Earnings season reveals the mood of corporate America

Earnings reports are like report cards for corporate America, and they can tell us a lot about what the economy is doing and what it expects to do. Alphabet reported disappointing earnings on Tuesday: revenue growth slowed — down significantly — 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 estimates.

“I think the sentiment on the reports has been generally positive,” said Alex Zukin, managing director of Wolfe Research. “It’s a prospect that gives people a little hesitation.”

The outlook is the part of the earnings report where companies say what they think will happen down the road. Microsoft, for example, suggested slowing demand for some of its products, Zukin said. Some other red flags Zukin saw are companies suddenly focusing on cutting costs.

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“How do we ensure that every dollar we spend is spent the right way?” he said. “Those two things are usually an ominous sign for the demand environment going forward.”

And there’s a significant difference between 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 if you’re dealing with consumers and individuals, then you’re doing great so far, and actually the outlook for next year is pretty good.”

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

“On the other hand, if you’re selling to businesses, that’s when you start to see a decline,” Walker said.

Google, Microsoft and Texas Instruments all had forecasts that disappointed, and all three are selling to businesses. It’s businesses that are starting to feel the teeth of rising interest rates — rising interest rates make it harder to borrow and lower stock prices.

“It’s coming in waves,” said Joel Praken, chief U.S. economist at S&P Global Market Intelligence. “We’ve seen, for example, the housing industry as the first industry to respond with contracting.”

Next, he says, business expenses for equipment will decrease.

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“Somewhere in there, you’re going to see a decline in spending on consumer durables,” he said.

And all of this will start to show up in earnings reports as time goes on.

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