The extent of Wall Street’s nervousness about how far the US downturn is eroding American corporate profits was laid bare yesterday after Google shares sank by as much as a tenth despite a 35 per cent rise in earnings.

At the same time, traders flinched at warnings from Microsoft, the software group, about a “tough environment” and a “difficult” internet advertising market.

Wall Street is anxious that the economic slowdown, the housing slump, reduced credit facilities, and soaring food and fuel costs are eating into consumer spending, which will in turn hit corporate profitability.

Google, the world’s biggest internet company, last night published second-quarter results for the three months ending June 30, showing that while net income had risen by more than a third to $1.25 billion, the increase was slightly lower than expected.

The profit performance unnerved Wall Street, which marked Google shares down by around a tenth in after-hours trading – the quarterly numbers were published after the New York stock market had closed. The shares traded at about $480 each, having reached as high as $741.79 at the end of last year.

While gross revenue for the period rose in line with expectations by 39 per cent to $5.37 billion, analysts were concerned about the slowing number of paid clicks.

Despite Google’s revenues being derived from a number of different countries, the internet search and e-mail company remains heavily exposed to the US and the UK, both of which are threatened by recession.

Revenue extracted from outside the US – $2.8 billion during the second quarter – represented 52 per cent of total group sales, up from 48 per cent for the same period the year before. Revenue derived from the UK rose to $774 million, or 14 per cent of total sales, having slipped from 15 per cent for the corresponding quarter in 2007.

Microsoft, whose shares sank 6 per cent in after hours trading to $25.70, sought to calm investors when it claimed it had managed to avoid the worst of the slowdown in the market-place.

Chris Liddell, finance director at Microsoft, said: “It hasn’t hurt us significantly. It’s what I would describe as a tough environment. It’s clear other companies around us are suffering.”

Microsoft slightly lowered its forecast for 2009, estimating that sales would now grow between 11 and 13 per cent.

Last night, Microsoft published its full-year results for 2008 – profits climbed 26 per cent to $17.7 billion while sales jumped 18 per cent to $60.4 billion.

However, Wall Street faced a mixed message about how far the US slowdown was affecting American companies after IBM unveiled far better than expected second-quarter profits, up 22 per cent. The company even raised its full-year profit outlook for 2008 in defiance of the threatening recession as it boasted that its core business was continuing to perform well.

IBM unveiled second-quarter profits of $2.77 billion, compared with $2.26 billion for the same period last year.

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