Fed May Put a Damper on Goldilocks Soft Landing. What Could Go Wrong.

The S&P 500 is up 20% in 2023. Analysts at Citi see another 10% gain by the end of next year, though they warn stocks may go down before they go up.

Investors certainly see a Goldilocks scenario playing out. On the day where we see the new inflation data, they’re banking on consumer prices softening enough over the next few months to allow the Federal Reserve to cut rates next year. There may be an economic slump, but not a big enough one to hurt company earnings much.

This storyline isn’t impossible. Yet when it’s all spelled out, it’s easy to see how things could go wrong. Consumer spending could stay resilient as the labor market stays strong, keeping inflation too hot. That would mean the Fed keeps rates higher, which undermines the rally in equities.

On the other hand, the most aggressive interest-rate increases in a generation may soon start to bite into consumer spending. That would encourage interest-rate cuts, but it would also pull the rug out from earnings.

Companies are already bracing for a slowdown. That’s clear from recently announced layoffs at Spotify and
Hasbro
–there’s nothing that screams caution quite as much as a toy company cutting jobs just in time for Christmas.

Either way, stock investors will be able to compare their view with the Fed’s when the central bank publishes forecasts Wednesday. There’s a good chance they won’t match up.

—Brian Swint

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Google Loses Court Battle Against Fortnite-Maker Epic

Alphabet
-owned Google lost an antitrust case filed by Epic Games. A federal jury in California determined Monday that it maintains a monopoly in its app store’s distribution and payments market.

• Videogame maker Epic filed the lawsuit three years ago, saying Google used its position dominating the Android app distribution market to wring profit out of developers.

• The unanimous verdict came after three hours of deliberation following a four-week trial, the Associated Press reported.

• Epic argued that Google thwarted competition in its lucrative app store, where it charged 15% to 30% commission on digital transactions made inside apps. Google argued that the partnerships it arranged helped Android phones better compete with rival Apple.

• In April, Epic lost a similar suit when a judge ruled that Apple’s app store didn’t violate antitrust law.

What’s Next: Google said it will appeal the verdict. But if it stands, one big question will be the financial impact of any fines. Another is how the rules around app stores will change. Following the verdict, a U.S. District Court judge in California will decide whether Google has to allow payment and app distribution outside its own Google Play app store.

—Liz Moyer

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Oracle’s Sales Disappoint as Cloud Momentum Slows

Oracle
reported disappointing November-quarter financial results, falling short of its own outlook and Wall Street expectations, as growth in its cloud business slowed for the second-consecutive quarter. The company said it was building 100 new cloud datacenters to meet growing demand.

• Cloud revenue rose 25% in the November quarter, down from the 30% growth in the previous quarter. Oracle Cloud Infrastructure is making its way into what had been widely perceived as a three-way battle between Amazon Web Services, Microsoft Azure, and Alphabet’s Google Cloud.

• Oracle is also struggling to fully integrate Cerner, an electronic health records company it acquired for $28 billion in 2022. Oracle has been revamping Cerner’s strategy to be focused on cloud delivery, causing some disruption in its business and pressuring Oracle’s overall growth rate.

• For the fiscal second quarter ended Nov. 30, Oracle said revenue rose 5% to $12.9 billion. Chairman Larry Ellison told analysts on a conference call that the cloud infrastructure growth rate could be over 50% as more data centers come online.

• For the February quarter, CEO Safra Catz sees revenue growing between 6% and 8% including Cerner, or 8% to 10% excluding Cerner. Oracle sees adjusted profit of $1.35 to $1.39 a share, in line with Street estimates.

What’s Next: Catz said demand for its cloud infrastructure and generative AI services is increasing at an astronomical rate. Oracle expects about $8 billion this year on capital spending, with a considerable spending acceleration in the second half.

—Eric J. Savitz and Janet H. Cho

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Occidental Petroleum Joins Oil Industry’s Latest Merger Spree

Occidental Petroleum’s
$10.8 billion deal to buy West Texas oil producer CrownRock gives the company 94,000 net acres in a coveted part of the shale-rich Permian basin and helps it keep up with bigger rivals who are also striking deals as consolidation heats up.

• The purchase would add about 170,000 barrels of oil equivalent a day to Occidental’s 2024 production and 1,700 undeveloped locations. Unlike
  Exxon Mobil’s
  acquisition of
  Pioneer Natural Resources,
  and
  Chevron’s
  purchase of
  Hess,
  Occidental is using debt to finance the transaction.

• Occidental will incur $9.1 billion of new debt, issue about $1.7 billion of common equity, and take on CrownRock’s $1.2 billion existing debt. Warren Buffett’s
  Berkshire Hathaway,
  which owns about 26% of Occidental, isn’t providing financing to buy CrownRock.

• Occidental spent $38 billion in 2019 to acquire Permian rival Anadark Petroleum, with backing from Berkshire. The deal left Occidental with debt and sent it to the brink of bankruptcy during the pandemic when oil prices plunged. Occidental recovered, posting a record $13.3 billion profit last year.

• The deal also comes as oil company investors clamor for shareholder payouts. Occidental is raising its quarterly dividend to 22 cents a share, and outlined plans to shed $4.5 billion to $6 billion in assets within 12 months and reduce debt by at least $4.5 billion.

What’s Next: Nations hoping for a global agreement to phase out fossil fuels saw their hopes diminish at the COP28 U.N. climate summit in Dubai. A draft proposal by the host country and major oil producer United Arab Emirates said fossil-fuel burning could continue.

—Janet H. Cho and Andrew Bary

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Study Casts Shadow on Long-Lasting Effects of Weight-Loss Drugs

A new study cast doubt on the lasting effects of
Eli Lilly’s
weight-loss drug, reporting that those who stopped taking Zepbound regained about half of the weight they lost on it within a year. The 88-week study funded by Lilly suggests that people have to keep taking it to sustain weight loss.

• The study, published in the Journal of the American Medical Association, found people regained 15% of their weight after taking Zepbound for 36 weeks and then stopping. They still lost weight compared with when they first started taking the drug.

• Among those who stopped taking Zepbound, about 17% maintained at least 80% of their original weight loss, the study said. The study appears to confirm data that shows people who took rival
  Novo Nordisk’s
  weight-loss drug also regain weight once they stop taking it.

• Jeff Emmick, a medical doctor and Lilly’s senior vice president of product development, said in a statement that obesity is a chronic disease that often requires ongoing treatment, something that is often misunderstood.

What’s Next: Lilly’s Zepbound hit pharmacy shelves in December at a price of $25 a month for people with commercial insurance that covers it or about $550 a month for those whose insurance won’t cover the drug. Analysts expect Zepbound sales to reach $2 billion in 2024.

—Janet H. Cho and Angela Palumbo

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Forecasts for Warmer Winter Sending Natural Gas Prices Lower

Natural gas prices are at six-month lows on fears that mild winter weather in the northern U.S. will weigh on demand. The El Niño weather pattern emerged for the first time in four years, according to the National Weather Service. That means warmer than average temperatures for what are normally the snowy states.

• Natural gas futures fell 5.8% on Monday, their largest one-day drop since Nov. 6, and their lowest close since June 14. The National Weather Service forecast above-average temperatures in the North and East in December and for the three months through February.

• BOK Financial analyst Dennis Kissler calls it a “warm weather washout” for natural gas prices as producers and traders continue on the sell side. He says the market is likely oversold, and thinks demand is stronger than anticipated.

• Separately, Carl Icahn’s investment company trimmed its stake in Ohio electric utility
  FirstEnergy
  below the 1.5% ownership threshold that gave it board seats, according to a regulatory filing. Andrew Teno, a portfolio manager at Icahn Capital, has resigned from FirstEnergy’s board.

What’s Next: Financial firm
LSEG
told Reuters that average gas output in the continental U.S. was running slightly higher in December from a record in November. The U.S. began winter with the most natural gas in storage since 2020, the Energy Information Administration said.

—Liz Moyer

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***

—Newsletter edited by Liz Moyer, Rupert Steiner, Callum Keown, Steve Goldstein