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Reading Q3 Earnings Tea Leaves After the FedEx Bombshell

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The FedEx (FDX - Free Report) pre-announcement has spooked the market as it feeds into the long-feared narrative of an impending negative turn in the economy.

FedEx, scheduled to report results on Thursday, September 22nd, came up short of its own targets as it faced fast-declining shipping demand in Asia and Europe, which the company sees as providing an early read on what to expect globally.

As we all know, FedEx is no ordinary economic actor, as its business literally touches every corner of the global economy. The shortfall in FedEx Ground, the unit that is tied closely to e-commerce deliveries in the U.S., has read-through implications for the U.S. consumer and operators in the digital economy. This is significant since the next few months of the year include the holiday shopping season.

As unsettling as FedEx’s bombshell is for our reading of the macro picture, we shouldn’t lose sight of the company’s operational and management challenges.

I see the withdrawal of the full-year guidance — that was initially put in place just three months back — by the new management team as more a comment on their grasp of the ground reality than the fast-shifting macro landscape. Needless to say that FedEx’s new management team is off to a terrible start in establishing its credibility with the market, particularly if UPS (UPS - Free Report) and others don’t validate their outlook.

FedEx’s company specific challenges notwithstanding, we know that the macroeconomic landscape is expected to be tougher. Europe is practically in a recession already and China has held itself down with its zero-Covid policy. The U.S. economy has been faring better, but everyone knows there is pain ahead. The Fed Chief ‘promised’ us that in his Jackson Hole speech.

The lagging effect of the extraordinary tightening already implemented and the incremental rate hikes ahead, including in next week’s Fed meeting, will at least slow down the economy — if not push us into a recession, as many have started to fear.

All of this has direct earnings implications, as estimates for the coming periods get trimmed.

To get a sense of what is currently expected, take a look at the chart below that shows current earnings and revenue growth expectations for the S&P 500 index for 2022 Q3 and the following three quarters:

Zacks Investment Research
Image Source: Zacks Investment Research

As you can see here, 2022 Q3 earnings are expected to be up +1.2% on +9.1% higher revenues. Keep in mind that it is the strong contribution from the Energy sector that is keeping the aggregate Q3 earnings growth in positive territory. Excluding the Energy sector, Q3 earnings for the rest of the S&P 500 index would be down -5.5% from the same period last year.

Analysts have been lowering their estimates since the quarter got underway, as the chart below shows:


Zacks Investment Research
Image Source: Zacks Investment Research

The -5.5% decline expected in Q3 on an ex-Energy basis is down from +2.1% in early July.

Q3 estimates have come down for all sectors, except Energy and Autos, with the biggest declines at Consumer Discretionary, Basic Materials, Consumer Staples, Technology and Construction.

Estimates for 2022 Q4 and full-year 2024 have also been coming down.

The chart below shows the comparable picture on an annual basis:



Zacks Investment Research
Image Source: Zacks Investment Research

The +6.9% earnings growth expected for the index this year drops to +0.3% once the Energy sector’s contribution is excluded.

The chart below shows how the aggregate bottom-up earnings total for 2023 on an ex-Energy basis has evolved lately:


Zacks Investment Research
Image Source: Zacks Investment Research

Next Week’s Reporting Docket

The FedEx release was actually a pre-announcement, the actual quarterly report comes out on Thursday, September 22nd. There are 7 other S&P 500 members on deck to report results this week, in addition to FedEx. The ones we will be closely watching are from General Mills (GIS - Free Report) and Accenture (ACN - Free Report) on Wednesday, Costco (COST - Free Report) on Thursday.

Given the FedEx pre-announcement and the weak Adobe (ADBE - Free Report) guidance, we will be closely watching whether the problems in these two companies are specific to them or something more endemic.

For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>> Q3 Earnings Season Gets Underway  


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