"We are seeing volume declines in every segment around the world"
- FedEx CEO
In September 2022, the FedEx (FDX) share price tumbled 30% when the company reported a plunge in global shipping volumes. FDX is widely seen as the life blood of the US economy and the world. As a bellwether for overall economic health, it is particularly sensitive to economic activity. So, when the FDX share price collapses in an economic slowdown it highlights the poor health of the US stock market.
Source: FactSet
FDX’s weak earnings outlook will not be an isolated case and highlights the next phase of the stock market correction. Over the last few months, the market correction has mostly been about rising interest rates. The next leg down of the bear market is going to be about falling earnings expectations.
The FDX CEO warned of an impending worldwide recession in an interview on CNBC. It is not a surprise that he made this comment because FDX’s earnings always collapse when the US economy moves into a recession, with 2001, 2008, and 2020 no exception.
Source: FactSet
In an earnings recession, cheap valuations do not provide protection from a bear market. For example, over the last six months FDX was trading on around a 9x PE multiple that would make most value minded investors salivate. However, its undemanding PE multiple did not prevent its stock price collapsing 30%, when the company withdrew its earnings guidance. After the earnings slump, FDX continues to trade on a 9x PE multiple.
FedEx is considered a global cyclical stock. The dangers of earnings risk are more acute in stock markets with greater exposure to cyclicals. For example, the Australian market is dominated by Resources and Banks, which make up close to 50% of the entire market. On the other hand, the US market is led by the technology sector at more than 20% of the market. With a greater proportion of cyclical stocks, the Aussie market tends to trade at a lower valuation multiple than the US market.
Source: FactSet
The recent correction has led to market valuations looking reasonable again on an absolute basis. However, the spread between the market's earnings yield and interest rates offers little margin of safety given the recent surge in rates.
Source: FactSet
As earnings expectations fall further it will make the stock market more expensive relative to bonds. Currently, both the Aussie and the US market are still recording positive year on year EPS growth. But with no sign of the global slowdown abating, it is likely that EPS growth will become negative like during the recessionary environments of 2001, 2008, and 2020.
Source: FactSet
Conclusion While the stock market’s PE has retraced to levels that might seem attractive to some investors, all is not what it seems. FDX’s earnings downgrade could be the canary in the coalmine, forewarning of a second leg down in markets when earnings expectations are revised down. In this scenario, the market PE would be a lot higher than currently forecast as the ‘E’ tumbles in an economic recession. This uncertain environment is not healthy for volatile assets and Vertium is well prepared for the challenges ahead.