FedEx is flashing a recession warning sign – but there are reasons to view it with skepticism

After FedEx Corp. FDX-N reported weak preliminary financial results and warned of a recession, the stock market shuddered, highlighting the importance many investors attribute to the global delivery giant.

FedEx’s share price fell 21.4 per cent on Friday, and dragged down major indexes.

The S&P 500 declined 1.4 per cent in morning trading, before ending the day down 0.7 per cent. Canada’s S&P/TSX Composite Index declined 0.9 per cent.

The declines added to a turbulent week for markets: U.S. stocks fell by the most in more than two years in a particularly dramatic selloff on Tuesday, raising concerns that this year’s volatility will persist.

But investors may be overstating the influence of a single company.

FedEx has a long reach into fundamentally important aspects of the global economy, from corporate activity to consumer spending. That’s why the company is widely viewed as a bellwether for the broader market: When it is struggling, the economy is in trouble, or so the thinking goes.

Anyone concerned about the health of the global economy amid soaring inflation and rising interest rates could find something to worry about in FedEx’s financial warning.

Though the company won’t release its latest official quarterly financial results until next week, it “preannounced” the more urgent elements on Thursday after markets closed.

A couple of ominous standouts: The company expects profits will miss analysts’ estimates by a jaw-dropping 33 per cent because of declining shipping volumes; and it withdrew its full-year outlook, which implies that operating conditions are changing, and fast.

Indeed, Raj Subramaniam, chief executive officer at FedEx, told CNBC that he is expecting a “worldwide recession.”

It’s a prediction that carries some weight, given that Mr. Subramaniam operates a massive company at the nexus of the global economy.

That may explain why the stock market’s reaction on Friday walloped economically sensitive sectors such as energy, materials, industrials and consumer discretionary stocks.

Still, there are a couple of reasons to stay calm, or at least take FedEx’s bellwether status with some skepticism.

First, there is always the possibility that this quarter’s poor results can be blamed at least partly on FedEx itself, rather than the economy. Some analysts raised this issue in their initial assessments of the company’s results.

Ariel Rosa, an analyst at Credit Suisse, wondered whether the company’s inability to anticipate the issues it now faces suggests that the organization may be too complex to achieve satisfactory financial results over the long term.

“The burden of proof now sits with management,” Mr. Rosa said in a note.

Second, it’s not hard to poke holes in FedEx’s predictive abilities: Investors and economists have known for months that the global economy is teetering on the edge of recession as central banks raise rates aggressively in an attempt to bring down inflation.

The price of copper – casually known as Dr. Copper for its ability to forecast turns in economic activity – fell 38 per cent from early March to mid-July, suggesting trouble was brewing several months ago.

Walmart Inc. WMT-N, another widely embraced bellwether that offers a window into retail spending, warned of layoffs, falling profits and excess inventory in July and August.

FedEx, then, may be arriving a bit late with its own warning signs.

“Under normal conditions, I would regard FedEx as an excellent coincident economic indicator. However, there are at least two special factors that cast some doubt on just how meaningful it is at present,” Douglas Porter, chief economist at BMO Nesbitt Burns, said in an e-mail.

As the service sector opens up, Mr. Porter explained, consumer spending is shifting away from goods – FedEx’s business – and toward areas such as travel and leisure.

As well, consumers can now venture back to stores, reducing the need for delivery companies that played essential roles during particularly stressful times of the pandemic.

Jack Ablin, chief investment officer at Chicago-based Cresset Capital, noted that a lot of FedEx’s challenges relate to China, where lockdowns have hobbled economic activity, and Europe, where an energy crisis is brewing.

That hardly seems surprising, he said, and it follows a global supply shock when businesses and consumers stocked up over concerns of being caught short of essential products.

“My first take on FedEx was, yeah, this is bad news for the global economy. But I’m not really worried about this impacting global stock values,” Mr. Ablin said in an interview.