Earnings season reveals the mood of corporate America

Income reports are like corporate America’s report cards, and they can tell us a lot about what the economy is doing and is expected to do. Alphabet reported disappointing earnings on Tuesday, with revenue growth slowing — 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 expectations.

“I think the sentiment in the reports was broadly positive,” said Wolfe Research CEO Alex Zukin. “It’s a prospect 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 slowing demand for some of its products, Zukin said. Some other red flags Zukin has seen are companies suddenly focusing on cutting costs.

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“How do you make sure that every dollar you spend is spent right?” He said. “These two things are usually an ominous sign for the demand environment going forward.”

And there is a clear difference between companies that have a negative outlook 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 interacting with consumers and individuals, you’re doing great so far and 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 outperformed earnings.

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

Google, Microsoft and Texas Instruments all missed forecasts, and all three companies are selling to businesses. It is companies that are beginning to feel the teeth of rising interest rates – rising interest rates make borrowing more difficult and therefore lower share prices.

“It comes in waves,” said Joel Prakken, chief U.S. economist at S&P Global Market Intelligence. “For example, the housing sector is the first sector to respond with contracting.

He goes on to say that business expenses for equipment will decrease.

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

And all of this will show up in income statements over time.

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