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 is expected to do. Letters reported disappointing results on Tuesday: revenue growth fell – 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, most S&P 500 companies have reported beating expectations.

“I think the way these reports have changed is generally for the better,” said Alex Zukin, managing director at Wolfe Research. “It’s an attitude that’s giving people a little bit of skepticism.”

Outlook is the part of the earnings report where companies tell you what they think will happen down the road. Microsoft, for example, has proposed reducing the need for certain products, Zukin said. 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 wisely?” he said. “These two things are often a warning sign in important areas in the future.”

And there’s a big difference between companies that have bad reviews or bad profits, 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 doing well so far and the outlook is good for next year.”

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The job market is good, so it’s no surprise that Payroll ADP processor wins profits.

“On the other hand, if you’re selling to companies then you’re starting to see a decline,” Walker said.

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

“It comes back,” said Joel Prakken, US economist with S&P Global Market Intelligence. “For example, we have seen, the housing sector is the first sector to take action in creating contracts.”

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Then he says, the cost of buying equipment will fall.

“Somewhere in the mix you’re going to see a decline in fixed income,” he said.

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

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