The Doyle Report: The “Which Way is Up for the Economy” Edition for the Week of Oct. 26

In early August 2015, Cisco posted better than expected earnings and Pure Storage filed for its initial public offering (IPO). Afterwards, I went out on a limb and said that the news boded well for stocks for fall and, “fingers crossed, heading into winter.”

Just two days later, the market began its epic swoon. Between the 14^th, when I said those words, and the 25^th, when the market hit a bottom, the Dow Jones Industrials fell to 15,666.44 from 17,477.40.

So much for predictions.

But then a funny thing happened to the markets: they recovered. On Monday, Oct. 26, the Dow topped 17,660 for a moment—nearly 200 points higher than on Aug. 14 when I speculated in a podcast about things boding well for fall. The NASDAQ, meanwhile, topped 5,045 on Monday the 26^th, which is just three points shy of where it was on Aug. 14.

So what’s happened since, and what do the number say about the state of the channel?

Several things. Let’s start with the recent quarterly earnings reports from vendors and solution providers alike.

Last week, IBM disappointed virtually everyone when it released worse than expected results for the third quarter. Sales totaled $19.28 billion, which “missed even the most pessimistic estimates,” according to CNBC. Then on the 22^nd, Microsoft released results for its fiscal fourth quarter. The VAR Guy said the first quarter results revealed “a 12 percent decline in revenue but a slight increase in earnings.”

While a surface comparison might lead one to conclude that the industry is in trouble, a more nuanced look suggests otherwise.

IBM, obviously, is suffering from reduced government spending in many places around the world, a major technology transition underway in the data center and an unfavorable currency climate for U.S.-based companies. Microsoft is similarly challenged by currency and a soft PC market. But its cloud sales, which climbed 8 percent year-over-year, gave pundits reason to smile. Since releasing its results last week, they’ve helped drive up Microsoft shares to above $54 each, which is more than at any time since 2009.

There are other companies that offer some indication as to which way the market and the industry as a whole is going. But again the signals are mixed. Accenture, for example, reported tepid earnings in September. Earnings grew just 1 percent. But the strong U.S. dollar is a big reason why. When viewed in constant currency, sales were up by a robust 12 percent.

Which brings me to this week. On Tuesday, Apple, Twitter and Alibaba report earnings. Later in the week, Yelp, Nintendo, Sony and Samsung will report. Apple is expected to knock it out of the park with robust phone sales while Alibaba is expected to give up insights as to the real strength of the Chinese economy, the world’s first or second-largest depending upon how you account for local purchasing power.

Beyond these understandings, what will we learn after this earnings season? That some companies are doing better than others? Duh. But also that some segments are doing better than others, some companies, too. AWS is powering ahead and will soon be a $7 billion business. Oh and its profitable. (That’s the power of scale in cloud computing.) In contrast, HP remains a mystery. (But we now know it’s getting out of the public cloud business.)

As for segments, consumer spending is still strong—it was in August anyway—but business activity is clearly slowing. On Monday, Oct. 26, The Wall Street Journal reported that “Quarterly profits and revenue at big American companies are poised to decline for the first time since the recession, as some industrial firms warn of a pullback in spending.”

What does this say about the channel? I think it says careful where you step. Cloud adoption is accelerating. PCs are likely to remain soft. And everything is going mobile. More broadly, channel companies that I have spoken with of late say they have more business than they can handle. Good talent remains in short supply and prices many are getting for the sale of their companies are better than they have been in years—at least for those with strong recurring sales and investments into the cloud.

No question concerns remain. What if the Chinese economy blows up? What if a terror event sours the economic climate? What if the Fed raises interest rates? What if the latest Silicon Valley economy is ready to implode after all? (If you haven’t read Nick Bilton’s Vanity Fair piece from September on whether the Valley economy is set to burst, make sure you do.)

If you’re wanting to go out on a limb and make a call for the fourth quarter, by all means let me know: [email protected].