FedEx May Be Wile E. Coyote Moment For Economy, Markets

Wall Street will spend the final day of a somewhat tedious week fretting over FedEx, whose CEO on Thursday evening said the world is headed for a recession.

“Raj, are we going into a worldwide recession?” Jim Cramer wondered, squinting at Raj Subramaniam during an on-set interview.

“Well, I’m not an economist…”, Subramaniam began. Cramer stopped him. “Ohhh, you know more than economists, come on,” Cramer half-joked. “I think so,” Raj responded. “You think we are going into a worldwide recession?” Cramer pressed. “These numbers don’t portend very well,” Subramaniam said.

“These numbers” were an egregious set of preliminary results, which fell so far short of estimates that it was scarcely worth drawing comparisons. Adjusted earnings of $3.44 were a woeful miss versus the $5.10 analysts expected, and the $2.75 the company sees for fiscal Q2 amounted to just half of Street forecasts. (To be fair, the company said $2.75 “or greater.”)

“Global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the US,” Subramaniam told investors, calling the situation “disappointing.” FedEx pulled its full-year outlook. The shares were on track for a historically poor session (figure below).

The company said sweeping cost cuts — including reduced flight frequencies, “temporarily parking aircraft,” “volume-related reductions in labor hours,” curbs to Sunday operations, hiring “deferrals” and the closure of 90 offices including a handful of corporate facilities — will help “mitigate the effects of reduced demand.”

But “mitigate” isn’t the same as “offset.” Indeed, FedEx expressed palpable concern about the “speed at which conditions shifted” and what the company called “a continued volatile operating environment.”

As Bloomberg noted, “Fedex’s bleak comments are a setback for [Subramaniam], who had won investor support shortly after taking the reins in June by raising the dividend, agreeing to revamp the board and laying out a multiyear plan to boost profit.”

This may be the first definitive sign that the earnings reckoning some top-down strategists spent the past six months warning about is finally upon us. Although Q2 results were better than expected as companies cleared a lowered bar, those of a cautious persuasion have variously insisted that forward earnings forecasts are destined to fall as company analysts can no longer ignore the writing on the wall. Historically, that moment comes too late, and only after the writing is scrawled in big, red letters by management.

As I wrote earlier this week, most are fully aware of the potential for earnings growth to decelerate meaningfully, and perhaps turn negative as a confluence of well-documented margin headwinds and execution missteps finally overcome the pricing power story. The problem is that, as Morgan Stanley’s Mike Wilson wrote, “stocks can stay elevated until the out year numbers come down.”

FedEx is a bellwether. The company’s warning could be the beginning of a Wile E. Coyote moment for equities if it presages a wave of guide downs and a wholesale rethink of the out year numbers Wilson (and others) have repeatedly insisted are at risk.

Notably, FedEx cautioned that its near-term outlook “assume[s] current economic forecast and fuel price expectations, no additional COVID-19-related business restrictions, successful completion of the planned stock repurchases during the second quarter, and no additional adverse geopolitical developments.” I suppose this goes without saying, but there are no guarantees on most of that.

“We’re seeing volume decline in every segment around the world,” Subramaniam went on to tell Cramer. “We’ve just started our second quarter [and] the weekly numbers are not looking good, so we just assume at this point that the economic conditions are not really good.” That’s probably a safe assumption.

“The S&P 500 is in its 20th bear market of the past 140 years. The average peak-to-trough decline is 37.3% and the average duration is 289 days,” BofA’s Michael Hartnett, who harbors many of the same reservations about equities as Morgan’s Wilson, wrote. He cited FedEx’s guide down in suggesting an “EPS recession shock [is] the catalyst for new lows” in US shares.

“We are a reflection of everybody else’s business,” Subramaniam reminded CNBC. “The headline really is the macro situation that we’re facing.”