Earnings season reveals the mood of corporate America

Earnings reports are like the report cards of 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 have exceeded revenue expectations.

“I think the mood of the reports is generally positive,” said Alex Zukin, managing director of Wolf Research. “It’s a view that gives people some hesitation.”

An outlook is the part of an earnings report where companies tell you what they think is going to happen down the road. For example, Zhukin said, Microsoft has been advised to reduce demand for some of its products. Some other red flags Zukin saw were companies suddenly focusing on cost cutting.

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“How do we make sure that every dollar we’re spending is being spent the right way?” He said. “Those two things are generally an ominous sign for the demand environment in the future.”

And there’s a telling difference between companies with negative outlooks or bad earnings and companies 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 customers or you’re dealing with customers and individuals you’re doing well so far and the outlook for next year is actually pretty good.”

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

“On the flip side, if you’re selling to companies you start to see a decline,” Walker said.

Google, Microsoft and Texas Instruments each had disappointing forecasts, and all three companies sold businesses. It’s businesses that begin to feel the teeth of rising interest rates — rising rates make borrowing tougher, and they drive down stock prices.

“It comes in waves,” said Joel Praken, chief U.S. economist at S&P Global Market Intelligence. “For example, we saw that the housing sector was the first sector to respond through contracting.”

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Next, he says, business spending on equipment will fall.

“Somewhere in the mix you will see a decline 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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