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Earnings Watch: One company could determine if U.S. corporate profits rise to a record next year

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As Wall Street looks toward 2023, earnings growth for the companies that make up the S&P 500 index could hinge on just one of them: Amazon.com Inc.

Amazon
AMZN,
-1.39%
,
the online retail giant whose stock has fallen 46% so far this year on concerns about shakier e-commerce demand, is expected to be the biggest contributor to gains in the index’s Consumer Discretionary sector, FactSet reports. That sector, in turn, is expected to be the biggest earnings gainer in the index overall, according to FactSet.

“At the company level, Amazon.com is expected to be the largest contributor to earnings growth for the sector for the year, accounting for almost half of the projected earnings growth for the sector,” FactSet Senior Earnings Analyst John Butters wrote in a report on Friday.

As this column reported last week, Wall Street analysts expect profits to hit a record this year and next year, despite fears of a recession and inflationary pressures on consumers. Of the 11 sectors tracked by FactSet, the S&P 500’s Consumer Discretionary sector is expected to turn out the biggest year-over-year earnings growth next year — 35.8%. Without Amazon, the earnings increase for that sector would shrink to 18.6%.

But for Amazon to do that kind of heavy lifting, it will have to find ways to entice consumers who have been more reluctant to click away buying things online. And it will have to find ways to draw bigger gains out of its cloud-services division as tech spending becomes more iffy.

See also: Amazon CEO says more layoffs are coming in 2023

Amazon on average is expected to swing to a profit of $1.86 per share in 2023 by analysts, contrasting with an expected loss of 10 cents a share currently expected for 2022 after three quarters of reported returns. That loss was driven in large part by the plummeting value of its stake in electric vehicle maker Rivian Automotive Inc.
RIVN,
-4.51%
.

But Amazon has also forecast fourth-quarter profit and sales that were below Wall Street’s expectations, as rising prices raise concerns about a more cautious, bargain-hungry holiday-season shopper. And since Sept. 30, Amazon has been the biggest drag on earnings for consumer-discretionary companies, according to the FactSet report.

However, even as economists remain concerned about a recession next year, analysts expect earnings for the index overall to increase 5.5% in 2023, according to the FactSet report. But that’s below the 10-year average, and analysts expect most of that growth to happen in the back half of the year. They also expect the S&P 500 index’s
SPX,
-0.73%

value overall to rise 13% next year, the report said.

This week in earnings

As the volume of earnings reports slows to a trickle this month, only six S&P 500 companies are expected to report quarterly results in the week ahead, according to FactSet. But those results will add more insight on the technology and outdoor-leisure industries, which are both dealing with the aftereffects of a pandemic-related surge in demand in 2020 and 2021.

Software giant Oracle Corp.
ORCL,
-0.26%

reports earnings on Monday, and Adobe Inc.
ADBE,
-0.58%

reports reports on Thursday, as Wall Street tries to suss out software demand amid a broader pullback in tech spending and tech-industry layoffs.

For more: Cloud software is a ‘fight for a knife in the mud,’ and Wall Street is souring on the one sector that was winning

Also during the week, grill maker Weber Inc.
WEBR,
-0.31%

and RV maker REV Group Inc.
REVG,
-1.13%

report on Wednesday, while RV maker Winnebago Industries Inc.
WGO,
+0.22%

reports on Friday. Taken together, the results will offer more context on peoples’ enthusiasm for road trips and outdoor excursions, which became more popular after the pandemic hit.

Elsewhere, home builder Lennar Corp.
LEN,
-1.04%

releases its earnings on Wednesday, as rising mortgage rates, higher home prices and supply constraints weigh on the housing market. Manufacturing-services provider Jabil Inc.
JBL,
-0.39%

reports Thursday. Darden Restaurants Inc.,
DRI,
-0.83%
,
the owner of Olive Garden, reports results on Friday, as restaurants try to gauge how much customers will pay up to dine out while also navigating their own higher costs.

The calls to put on your calendar

Adobe, Oracle: In October, Adobe
ADBE,
-0.58%

said it would stick with its fourth-quarter outlook. The move made the company — known for the design platforms like Photoshop, Illustrator and InDesign — an outlier in the tech industry, where layoffs and weaker sales have become more prevalent.

“Over the course of the last month we received a deeper view on the impact that the macro environment is having on many software companies, and it’s clear growth has come under pressure and will continue to be under pressure in the near-term,” Stifel analysts said in a note late last month.

Adobe hasn’t been exempt from those issues. The company recently cut around 100 jobs, largely in sales, Bloomberg reported this month. And its $20 billion bid for Figma, a platform that allows users to collaborate on design projects, was reportedly facing deeper regulatory scrutiny. Analysts have also raised concerns about the acquisition’s hefty price.

“While the product/strategic fit is clearly aligned, it’s the price tag that is likely to lend credence to the bear case, at least for now,” Wells Fargo analyst Michael Turrin wrote in September, following a string of other analyst downgrades.

Oracle
ORCL,
-0.26%

will also report amid worries over easing sales and job cuts. But analysts have said the company, which develops cloud software and owns the Java programming language platform, could benefit from its Cerner division, and its ability to land larger deals. Case in point, Oracle was among the big tech companies who will be sharing a $9 billion contract to provide cloud services for the Pentagon, the Defense Department said on Wednesday.

The numbers to watch

The COVID-19 outdoors migration: Outdoor activity, from golfing to cookouts to camping, boomed in the early days of the pandemic, after many people found themselves bored and stuck at home. But as the last of COVID-19’s restrictions fall away and inflation forces more belt-tightening, Wall Street will get more details from Winnebago
WGO,
+0.22%

— which also makes firetrucks and ambulances — and Weber
WEBR,
-0.31%

on where demand stands as indoor activity re-emerges as competition for their bottom lines.

Rival RV-maker Thor Industries
THO,
+4.20%

on Wednesday reported falling quarterly sales — albeit from record levels in the same period last year. Chief Executive Bob Martin, in the company’s earnings release, said the recreational-vehicle industry had been hit by worries about the economy, adding that “the retail environment is being impacted by inflation and monetary policy driving higher interest rates.” However the company’s full fiscal-year sales forecast was a bit better than analysts expected.

Retail RV sales in North America fell 23% year-over-year in October and are down 22% year-to-date, Raymond James analyst Joseph Altobello said in a research note on Wednesday.

Meanwhile, there are signs of waning demand for grills. Last month, Weber rival Traeger Inc.
COOK,
-6.49%

revealed that retailers’ ongoing inventory purge would be a drag on full-year sales. After aggressively stocking up on goods to avoid a repeat of last year’s supply shortages, retailers this year often found themselves with too many items on their hands as inflation steered customers away from purchases.

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