Earnings Outlook: More Companies Warn of Tough 2023

Summary

• Most companies are reporting earnings and revenue beats – but also warn of tougher business conditions in 2023.
• Costco, the giant warehouse retailer, missed on revenue and earnings, and also warned of weaker demand – continuing a pattern of lower-income shoppers apparently being tapped out.
• Whether equities rally into year-end may depend on Tuesday’s CPI print and the Fed’s messaging after its rate-setting meeting on Wednesday. We do not expect the Fed to provide much comfort.
• Only nine companies report this week, but Oracle and Accenture will provide key reads on the outlook for enterprise spending on technology in 2023.

What We Learned Last Week

Equities continue to trade in a narrow range, with the glass-half-empty narrative dominating in recent days as markets fret about recession risks. Last week, the S&P 500 and NASDAQ 100 were down 3.4% and 3.6%, respectively.

Companies mostly continue to report beats on earnings and revenue. Many are indicating that supply chain issues from earlier this year are easing. Where they differ quite sharply is in the outlook for the coming quarter and year.

In the tech sector, semiconductor and software giant Broadcom (AVGO) beat on revenue and earnings per share (EPS). AVGO focuses mostly on the enterprise or corporate market, and they surprised analysts with a robust outlook despite some signs of weakness in this sector. Small companies that serve specialised niches, such as Guidewire (GWRE), MongoDB (MDB), and Ciena (CIEN), also surprised on the upside for both results and outlooks. But cybersecurity firm SentinelOne Inc. (S) was more downbeat, pointing to growing headwinds.

In the consumer sector, discount department store Ollie’s Bargain (OLLI) missed on revenue and EPS and offered a tepid outlook. It reported that people were buying less and focused on promotions – similar to Dollar General (DG) last week. Warehouse giant Costco also missed and warned of weaker demand. As we have noted, lower-income people who patronise these retailers appear to be tapped out.

The luxury sector is struggling too. Upscale furniture retailer RF (RF) said the outlook in the coming quarters was bleak. Lululemon Athletica (LULU) missed and forecast revenue was below expectations. It is also burdened with excess inventory. LULU stock is down 15%.

Yet, luxury homebuilder Toll Br. (TOL) posted a solid beat and a good outlook. Even as housing slows, homebuilders are well positioned to avoid collapsing and even remain profitable, albeit at lower levels.

Despite many companies signalling more difficult conditions in 2023, it may be several quarters before this reflects in earnings. Companies may be managing expectations down and continue to post better-than-expected earnings in the coming quarters.

The Week Ahead

Whether markets rally into year-end or not will depend largely on the Consumer Prices Index (CPI) update on Tuesday and a likely Fed rate hike on Wednesday, although the messaging will be what matters. We do not expect the Fed to deliver a comforting message.

It will be another light week earnings-wise, with only nine companies reporting. Although, several may provide useful insights into the economic outlook.

Monday

• Database giant Oracle (ORCL) will provide a key clue about enterprise demand for new technology in the coming months.

Wednesday

• Has homebuilder Lennar (LEN) worked off rising inventories due to cancellations earlier this year?

Thursday

• Adobe (ADBE) will be of particular interest given its exposure to both the consumer and enterprise sectors.
• Jabil Inc. (JBL) is another niche tech company that provides electronics and circuit design services and related manufacturing. It will likely either report a solid outlook or weak demand, depending on its client base.

Friday

• Accenture (ACN) is plugged into a broad cross-sector of the enterprise market; along with ORCL, its lookout will likely move the tech sector.
• Even as the cost of eating out has risen more rapidly than headline inflation, that hasn’t stopped people from patronising restaurants in 2022. Darden Restaurants (DRI) may indicate whether we can expect that to continue into 2023.

Over a 30-year career as a sell side analyst, John covered the structured finance and credit markets before serving as a corporate market strategist. In recent years, he has moved into a global strategist role.

(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)