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Market Insights

Huge FedEx profit warning is a red flag for the market

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FedEx. The delivery giant warned yesterday about slowing global economic growth, downgraded their outlook and withdrew profit guidance. The company now sees Q1 non-GAAP EPS of $3.44, well down from $4.37 last year and far below the market consensus of $5.14.

The stock has absolutely tanked in overnight trade, and is down by a little over 19% in pre-market.

FedEx

CEO Raj Subramaniam explained:

“Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the US. We are swiftly addressing these headwinds, but given the speed at which conditions shifted, first-quarter results are below our expectations.”

“While this performance is disappointing, we are aggressively accelerating cost reduction efforts and evaluating additional measures to enhance productivity, reduce variable costs, and implement structural cost-reduction initiatives. These efforts are aligned with the strategy we outlined in June, and I remain confident in achieving our fiscal year 2025 financial targets.”

2025 is a long way off, but fixing FedEx was always going to be a challenge for the new CEO who was only appointed in June. A slowing economy is just another problem to add to the list.

Why does this matter to the wider market?

Check out this market commentary via Don Hays/WSJ:

Noting this "FedEx indicator," Mr. Hays points out that the stock fell off last May, a suggestion to the Fed that they, and oil prices, "had moved to the point that choked off growth."

Hays added that the recovery seen in the stock price, seven months later, was a sign that the Fed could pull off the mythical soft landing. Much of this commentary could have been written yesterday. It was actually published in the WSJ on the 20th of February 2007.

Just six days later, the stock peaked at 121.42, and it was all downhill from there. FedEx stock plunged by over 70% across the next two years, eventually bottoming out at 34.12 in March 2009.

FedEx is considered a leading indicator for global trade. More trade equals more business for FedEx, and due to their size and global reach, the company is an excellent proxy for the health of the global economy.

It’s part of market folklore that former Fed Chair Alan Greenspan would regularly chat with Fred Smith, the then CEO of FedEx, to keep his finger on the pulse of the business world.

And this wasn’t the only global trade warning this week. The Drewry World Container Index fell by 8%, as the slowdown really started to bite:

drewry

The index is still well above the pre-pandemic levels, and somewhat higher than the five year average of $3,692. But the pace of this decline, coupled with the negative commentary from FedEx is a negative cocktail of news. Global goods trade is slowing.

So, can the soft landing be achieved? Or is this a case of history rhyming in a late cycle market environment? Time will tell, but the latest updates should give markets plenty of food for thought.

Not investment advice. Past performance does not guarantee or predict future performance.

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