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FedEx Warning of a Global Recession

  • JASON TEH, Chief Investment Officer
  • Oct 7, 2022
  • 2 min read

"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.

 
 
 

Commentaires


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This website and its contents are general in nature and do not constitute or convey personal financial advice. It has been prepared without consideration of anyone’s financial situation, needs, or financial objectives. Before acting on the areas discussed and contained herein, you should consider whether it is appropriate for you and whether you need to seek professional advice. Investment in securities and other financial products involves risk. An investment in a financial product may have the potential for capital growth and income but may also carry the risk that the total return on the investment may be less than the amount contributed directly by the investor. Investors risk losing some or all of their capital invested. Past performance is not a reliable indicator of future performance. The material contained in this website is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. The Company, its related parties and its respective officers may have an interest in the securities or derivatives of any entities referred to in this website. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities. Except for any liability which cannot be excluded, the authors of this website accept no liability for any loss or damage suffered by any person as a result of that person, or any other person, placing any reliance on the contents of this website.

Vertium Asset Management Pty Ltd (ABN 25 615 639 659), is a Corporate Authorised Representative (Corporate Authorised Representative Number 001258758) of Clime Asset Management Pty Ltd (ABN 72 098 420 770), AFSL 221146.

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