Did This Single Stock Just Signal a Deep Recession?

Stocks have had a rough week, and Friday morning doesn’t seem to be giving investors much relief. As of 8:30 am ET, futures contracts on the Dow Jones Industrial Average (^ DJI -0.93%), S&P 500 (^GSPC -1.25%)Y Nasdaq Composite (^IXIC -1.58%) it had fallen about 1%, adding to sharp declines that began in earnest after Tuesday morning’s unexpectedly small reduction in year-over-year consumer price inflation.

The fear that most investors have centers on the interaction between monetary policy and the strength of the economy. In particular, as the Federal Reserve appears poised to continue raising interest rates, the resulting impact will be a slowdown in economic activity that could trigger a recession. It is in that light that investors viewed the latest report from the shipping specialist. FedEx (FDX -21.77%) on Thursday night, and what they saw raised new concerns about what the future could bring to the economy and the stock market in the coming months.

FedEx falls on urgent alert

FedEx shares plunged 20% in premarket trading on Friday morning, following the release of its preliminary fiscal first-quarter financial results for the period ending Aug. 31. What the shipping giant said about the health of its business had serious implications for the broader economy.

At first glance, the immediate guidance FedEx provided was mixed. The company reported a 5% to 6% increase in revenue to approximately $23.2 billion. However, cost pressures weighed on its bottom line, with FedEx demanding adjusted earnings of $3.44 per share, up more than 21% year over year.

However, FedEx cast its report in a dovish light, citing weakness in global shipping volumes that only worsened in the closing weeks of the quarter. Macroeconomic weakness in the Asia-Pacific region and service hiccups in Europe hurt the FedEx Express segment, while FedEx Ground revenue also fell well short of the company’s forecast.

CEO Raj Subramaniam made it clear that there was little FedEx could do internally to counteract the impacts of external pressures. The company took immediate steps to cut expenses and respond to worsening macroeconomic conditions, but Subramaniam said the dramatic speed at which the deterioration occurred affected its ability to implement cost-cutting and productivity-enhancing measures.

FedEx withdrew its full fiscal 2023 earnings guidance, making it clear to investors that it lacks the ability to project what macroeconomic conditions might look like just a few months into the future. It explicitly said it expects further weakening in its fiscal second quarter, projecting earnings that are about half of what FedEx followers expected to see before the report.

Should investors worry?

Many people in the investment community see FedEx as a barometer of activity in the broader economy. Especially given the rise of e-commerce over time, investors may look at FedEx shipping volumes as a way of knowing how much business is being done, both between suppliers and manufacturers and between consumer-facing companies and their customers. If FedEx is seeing poor conditions, it suggests that those who use FedEx services don’t need the shipping giant as much as they do in a tough economic environment.

However, to get a more complete picture of the economics of shipping, it will be important to look at what other players in the industry are saying. Yes United Parcel Service indicates a similar weakness, then it could confirm what FedEx said. Also, how Amazon Yields will also be a key indicator as it has increasingly moved towards vertical integration of its own shipping. If Amazon is doing well while UPS and FedEx suffer, it could just mean a shift in logistics preferences rather than a dire sign of a full-blown economic downturn ahead.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Dan Caplinger has positions in Amazon. The Motley Fool has positions and recommends Amazon and FedEx. The Motley Fool has a disclosure policy.

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