Earnings season reveals the mood of corporate America

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

So far this earnings season, most of the S&P 500 companies that have reported have beaten revenue expectations.

“I think the mood for the report is generally positive,” said Alex Zukin, managing director at Wolfe Research. “It’s a view that gives people a little doubt.”

An outlook is the part of an earnings report where companies tell you what they think will happen down the road. Microsoft, for example, suggests decelerating demand for some of its products, said Zukin. Some of the other red flags Zukin saw were companies that suddenly focused on cutting costs.

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“How do we make sure that every dollar we spend is spent the right way?” he said. “Those two things are generally very positive signs for the demand environment going forward.”

And there’s a telling difference between companies that have a negative outlook or poor 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 if you’re dealing with consumers and individuals, then you’re really up to date and in fact the outlook is pretty 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 beating earnings.

“On the flip side, if you sell to a company then you start to see a decline,” Walker said.

Google, Microsoft, and Texas Instruments each had disappointing forecasts, and all three companies sold to businesses. These businesses are beginning to feel the teeth of rising interest rates – rising costs make borrowing harder and they lower stock prices.

“It’s coming in waves,” said Joel Prakken, chief U.S. economist with S&P Global Market Intelligence. “We have seen, for example, that the housing sector is the first sector to respond by contracting.”

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Then he said, business spending on equipment will decrease.

“Somewhere in the mix you’re going to see a dropoff in spending on consumer durables,” he said.

And all of that will start showing up in the earnings report in due course.

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