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Investors are scouring second-quarter earnings reports, including several landing this week in Canada and the U.S., for signs of an economic slowdown and just how bad it could get. The impact of surging inflation and energy prices on corporate margins and revenues, and the outlook for the last half of this year, are all expected to give a better indication of what’s to come.

Late Monday, Walmart Inc., the world’s largest retailer, cut its profit outlook for a second time in two months, saying inflation is causing shoppers to spend more on necessities such as food and less on discretionary items such as clothing and electronics. On Tuesday, corporate giants such as General Motors Co., Microsoft Corp. and Google parent Alphabet Inc. reported second-quarter results that fell short of Street expectations, which could fuel investor worries that companies are struggling with the impact of historically high inflation on consumer and business spending. A handful of companies beat expectations in their second-quarter reports on Tuesday, including Visa Inc., Coca-Cola Co. and McDonald’s Corp., which provided some optimism.

Still, some investors believe consensus analyst estimates are too high across most sectors and will be looking to see how potential downward revisions could affect stock prices and broader markets. For example, analysts have been busy slashing expectations for Canadian tech giant Shopify Inc.’s second-quarter financial results amid a global rout for technology stocks. Its results are out Wednesday. Shopify also announced Tuesday that it was laying off 10 per cent of its work force, or about 1,000 employees.

For the second quarter, total earnings for companies in the S&P 500 index are currently estimated to rise by 6.1 per cent (or down by 3.3 per cent when excluding energy) year over year, according to Refinitiv data as of July 25. Total earnings for companies in the S&P/TSX Composite Index are currently estimated to rise by 22.2 per cent (or up 3.9 per cent excluding energy) year over year in the quarter.

Christine Poole, chief executive officer and managing director at GlobeInvest Capital Management Inc., will be following management commentary on demand trends for their companies’ products and services to gain more insight into the extent of a slowdown across various sectors.

She’s also interested to hear more details about supply chain bottlenecks and transportation costs to gauge whether inflation pressures show any signs of easing.

“There are a lot of questions as to what companies are seeing and doing,” she says, including whether they’re pulling back on spending and hiring, and if they’re able to pass rising costs on to their customers.

Ms. Poole says this earnings season will reveal just how cautious consumers and companies are in the current economic environment.

Paul Harris, partner and portfolio manager at Harris Douglas Asset Management in Toronto, says analysts are “way too positive” on the economy and believes earnings estimates are higher than they should be, which could cause markets to fall further in the weeks ahead.

“The risk to the stock market is when analysts realize they have to bring their numbers down,” he says, something he expects to start happening soon as a huge swath of companies report earnings this week.

Some other big U.S. companies expected to release earnings in the coming days include Inc., Apple Inc., Procter & Gamble Co. and Ford Motor Co. The second-quarter earnings season also swings into high gear in Canada this week with reports expected from several large companies such as Canadian Pacific Railway Ltd., Canfor Corp., Canadian Utilities Ltd., Cenovus Energy Inc., Teck Resources Ltd. and Cameco Corp. Canadian National Railway Co. got a head start after markets closed on Tuesday, reporting sales and profit figures that beat market expectations.

Mr. Harris says he’s looking for opportunities to buy good-quality stocks that drop on missed analyst expectations in the days and weeks ahead.

“I believe that we’re in a profit cycle that’s going down and that’s not represented in the earnings numbers,” he says. “I want to be a little bit ahead of that and buy some of these stocks that I think are great businesses at a cheaper level.”

Mike Archibald, vice-president and portfolio manager at AGF Investments, says he’ll be focused on the corporate outlooks for the second half of the year, following what he expects will be a “decent” second-quarter reporting season. He also expects analysts’ estimates to come down in the next two quarters and for 2023 as many companies lower their guidance.

One example is Canada’s Stelco Holdings Inc., which reduced its second-half earnings guidance on Monday owing to falling prices for steel, a widely used commodity that’s considered a key indicator of economic growth.

The two sectors Mr. Archibald believes will provide the best clues for the economic outlook are industrials and consumer discretionary, given their direct connection to consumers.

Mr. Archibald expects the energy sector to continue to prop up the S&P/TSX versus the S&P 500 as oil and gas prices remain elevated.

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