5 Big Takeaways From This Earnings Season

Profits look strong

Earnings for companies in the S&P 500 are on pace to jump 10.8% from a year earlier, better than what analysts expected at the end of June and headed for the biggest quarterly increase in over two years, according to FactSet.

The problem is revenue, which is underperforming. That suggests profits are being driven by cost-cutting and one-time items, rather than strong underlying performance.

“There’s always one-time items, either gain or loss, or something close to the income to make that gain,” said Justin Burgin, vice president of equity research at Ameriprise Financial. “The true tell is revenue.”

People are cutting back on the little things

One reason for the underwhelming revenue: People are budgeting more.

McDonald’s said customers are picking cheaper items and going to its restaurants less often, driving down U.S. same-store sales for the first time since 2020. Starbucks reported another quarterly decline in sales, and Chipotle said its sales growth was cooling.

“Low-income consumers, in many cases, they’re dropping out of the market, eating at home and finding other ways to economize, cutting down on trips,” McDonald’s Chief Executive Chris Kempczinski said on the company’s earnings call.

French-fry supplier Lamb Weston felt the crunch, with shares tumbling 28% after it missed profit and sales expectations. Another casualty: potato chips. PepsiCo said shoppers are buying fewer bags of them.

The S&P 500’s consumer discretionary is down 1.3% this year, the only sector in the red.

High-end shoppers are economizing, too

The appetite for luxury watches, jewelry and clothes seemed endless not that long ago. Now even high-end shoppers are taking a breather.

The parent company of Louis Vuitton and Dior said sales rose a disappointing 1% from a year earlier. Gucci owner Kering said sales fell 11% and issued a profit warning. French distillery Rémy Cointreau flagged a sluggish market in China and posted an overall decline in sales. Germany’s Hugo Boss cut its sales guidance for the year.

Those upscale companies aren’t part of the S&P 500, but their performance offers insight into the financial health of both aspirational and ultra-wealthy shoppers.

High interest rates are weighing on banks

After paying basically nothing on savings accounts for years, banks are being forced to offer higher yields to prevent customers from taking their deposits elsewhere. That’s hurting their profit margins.

Higher rates also mean people take out and refinance fewer mortgages. Consumers are spending big on credit cards and carrying balances, which is giving banks a boost. But now more borrowers are falling behind on bills.

Investment banking and trading revenue, meanwhile, at banks including Goldman Sachs and JPMorgan Chase are showing signs of improvement.

Big tech isn’t letting up on its AI dreams

Tech titans have been riding high on hopes about the transformative powers of artificial-intelligence technology. Now they are spending billions of dollars to make those dreams happen.

“When you go through a curve like this, the risk of underinvesting is dramatically greater than the risk of overinvesting,” Alphabet Chief Executive Sundar Pichai said on a call with analysts.

Investors apparently aren’t so sure. Six of the Magnificent Seven group of tech titans have released results so far, and the stock prices of four dropped the day after they reported. Shares of Amazon tumbled 8.8%, Tesla dropped over 12%, Alphabet lost 5% and Microsoft slipped 1.1%.

Meta and Apple were the exceptions, with shares up 4.8% and 0.7%, respectively. Nvidia, the last member of the Magnificent Seven, reports on Aug. 28.

For the year, Wall Street remains optimistic. Analysts expect earnings will rise 10.2% in 2024, according to FactSet.

Write to Hardika Singh at hardika.singh@wsj.com