What the FedEx Warning Means for Your Investments

earnings seasonWith the recent corporate earnings release from shipping giant FedEx Corporation (NYSE/FDX) also came some dark clouds for the future. The company issued some downbeat estimates for the rest of the year; many investors should pay attention to what this might mean for the market and the economy as a whole.

With earnings season about to hit the markets shortly, we could well be on the edge of the cliff, ready to go over in a market correction if corporate earnings disappoint. FedEx essentially cut its forecast for global growth, stating that it sees less economic expansion than most analysts have predicted. They guided down future corporate earnings forecasts and I think a lot of the issues they’re dealing with will impact many companies, leading to a market correction.

Earnings season is important in obtaining information from companies used to estimate future guidance for corporate earnings. FedEx stated that both domestic and international shipments declined due to below-trend growth. To combat the future slowdown and prevent corporate earnings from declining completely, FedEx is parking some of its planes out of service until the firm can see some positive world economic growth. This can’t be a good sign for earnings season and the vast majority of companies that are international in nature, as corporate earnings might not be hurt this past quarter, but if they guide down the rest of the year, we could see the market correction we’ve all been worried about.

Since FedEx is involved in so many industries, it has a good idea of corporate earnings and economic growth. The firm lowered its global gross domestic product (GDP) growth estimates for the year down to 2.3% from 2.9% this past December. That is a sharp drop in a very short period of time.

FedEx is trying to preserve corporate earnings by reducing costs; in addition to parking planes, the company is reducing flight hours and squeezing productivity enhancements from all of its employees. This does not sound like a firm that’s about to be hiring thousands of people. This is a firm that is telling us that costs are rising at the same time that customers are shipping less and are using the lower-priced options. FedEx can’t transfer higher costs to the customers; so, to preserve corporate earnings, they’re trying their best to reduce costs. That can only go on for so long; at some point, you can’t cut anymore and corporate earnings get hit.

I think we’ll see many companies over the next several quarters with similar stories—higher costs and the inability to transfer these costs to the customers, so corporate earnings get hit. One of the major inputs that FedEx stated is hitting its corporate earnings is higher fuel costs. If the stocks you invest in use large quantities of fuel and aren’t hedged, they could get hit this earnings season. This is how a market correction starts; with one warning, followed by another and then another. I would certainly be cautious and take some profits off the table in names that have done very well since the fall of 2011 ahead of earnings season.

corporate earnings

Chart courtesy of www.StockCharts.com

If FedEx is telling us that it sees slower growth and higher costs, how much higher can the stock go? I think we might’ve seen a double top here and your risks to the downside if we get a market correction are substantial. We could certainly move down in price very quickly, especially if oil prices continue to remain high, as they have a big on impact corporate earnings. Don’t let this warning go to waste; remain cautious ahead of the oncoming earnings season and be prepared if we get a market correction.