The latest warning from shipping giant FedEx Corporation (NYSE/FDX) regarding its corporate earnings creates some dark clouds for the future of the S&P 500. Even if you’re not a FedEx shareholder, it’s important to understand what’s happening to the company’s corporate earnings, as it will have a cross-over effect on many companies in the S&P 500.
FedEx is now telling analysts that the firm might suffer a decline in quarterly corporate earnings, a first in almost three years. The company cites the worldwide economic slowdown, particularly in such areas as Europe and Asia. Many S&P 500 companies are extremely vulnerable to the global slowdown that FedEx is feeling, including the obvious comparison with United Parcel Service, Inc. (NYSE/UPS). But also exposed are firms like YUM! Brands, Inc. (NYSE/YUM), and Caterpillar Inc. (NYSE/CAT).
Corporate earnings for many S&P 500 firms are going to have significant headwinds if a large portion of their business was based on growth in Asia and Europe. While Europe is not really a surprise, many had felt that Asia could find a way to regain its growth path. With more S&P 500 companies lowering their guidance on their corporate earnings based on that region, it appears the slowdown is far worse than originally thought.
This is the second time this year that FedEx has released a warning. FedEx made similar statements in March that it was worried about economic growth. (See “What the FedEx Warning Means for Your Investments.”) It appears that positive signs have not yet emerged; otherwise the company wouldn’t be lowering guidance on its corporate earnings at this point. Many investors in international S&P 500 companies should also take a look at how much of the firm’s corporate earnings are originated from other nations, as this could be a problem going forward.
The company is trying to reduce expenses, including a buyout program for employees and the retirement of old, uneconomic aircrafts. The positive of these expense cuts is that when the economy does eventually rebound, this will be an even leaner company, with any upside in gross domestic product (GDP) ending up in its corporate earnings. However, it might be some time before we see economic growth.
Chart courtesy of www.StockCharts.com
The shares are now below its 200-day moving average (MA), and while there are several areas of support, I would urge caution. With corporate earnings continuing to suffer, many S&P 500 companies could also guide down their future estimates. If more companies were to come out with downward revisions for corporate earnings, we could see the S&P 500 encounter a strong sell-off in the fall. At this point, I would wait for a pullback closer to winter before thinking about entering into new S&P 500 positions, as this would allow for better timing for a potential rebound in corporate earnings for the first half of 2013.