Corporate America is beginning to prepare for a recession. Business leader FedEx (FDX) surprised Wall Street last week with a massive profit warning and a tepid outlook for the global economy.
Bad news from FedEx overshadowed a more promising development on Thursday, the agreement between rail operators and unions to avoid a potentially crippling rail freight strike.
Still, investors remain jittery about the health of the railroad business, which is a sign of jitters in the broader economy. Shares in top rail operators Union Pacific (UNP), CSX (CSX) and Norfolk Southern (NSC) are down sharply this year. Even Warren Buffett’s Berkshire Hathaway (BRKB), which owns Burlington Northern Santa Fe, has slumped lately.
But FedEx isn’t the only company ringing the recession alarm bells. In an unusually somber conference call earlier this month, the CEO of high-end furniture retailer RH (RH) (aka Restoration Hardware) said that “anyone who thinks we’re not in a recession is crazy,” adding that the housing market is crazy in a downturn that is “just beginning”.
Best Buy’s (BBY) CFO said in late August he expected sales growth to slow further. And while the company avoided using the term recession, Best Buy’s (BBY) CFO said there was “a belief that current trends in the macro environment may be even more challenging … for the remainder of the year.”
The CEO of PVH (PVH), which owns the Tommy Hilfiger and Calvin Klein brands, noted in the company’s earnings call in late August that “high gasoline prices and other inflationary pressures began to weigh on consumer spending over the summer,” adding The postponement, ” was most pronounced for us among middle-income, high-value consumers in North America.”
Chip equipment leader Applied Materials (AMAT) noted in an earnings call last month that some of its semiconductor customers are in slowdown mode “as macro uncertainty and weakness in consumer electronics and PCs cause these companies to delay some orders.”
These are ominous signs. And it’s likely that even more companies will be referencing the slowing economy in the coming weeks — some executives might even dare to use the R-word. Most of Corporate America operates on a calendar year schedule for earnings, which means they will report third-quarter results in October.
Tech titans Apple (AAPL) and Microsoft (MSFT), streaming leader Netflix (NFLX), consumer goods makers Coca-Cola (KO) and Procter & Gamble (PG), restaurant chains McDonald’s (MCD) and Chipotle (CMG) and leading banks JPMorgan Chase (JPM) and Goldman Sachs (GS) are just some of the blue chips set to provide financial updates next month.
The change in mood was dramatic. According to FactSet estimates as of June 30, earnings for the third quarter were expected to rise nearly 10% year over year.
But with companies and analysts lowering their forecasts, forecasts now call for just a 3.5% increase in earnings. That would be the worst quarter for earnings since a 5.7% decline in the third quarter of 2020 as the economy reeled from Covid-imposed lockdowns.
John Butters, senior earnings analyst at FactSet, noted that the magnitude of the change in earnings estimates is the largest since the second quarter of 2020, when many companies first went into shutdown mode.
Aggressive rate hikes by the Federal Reserve, which are expected to continue, with the Fed likely to raise rates significantly again later this week, are also fueling recession fears.
In addition, other global central banks including the European Central Bank and the Bank of England are also now in tightening mode. This increases the risk that a global rise in interest rates will lead to a further slowdown in profits, consumer spending and the broader economy.
“Sentiment and market momentum have turned decidedly negative,” said Mark Hackett, Nationwide’s head of investment research, in a report last week. “Profit fears have now come to the forefront of investors alongside inflation and the Fed.”
Hackett added that “growth expectations continue to weaken” and that CEOs and small businesses are increasingly concerned about a recession.
It’s worth noting that not all recessions are “great recessions” like 2008. The US economy had far more modest downturns in 1990 after oil prices skyrocketed during the first Gulf War, and in 2001 after the dot-com bubble burst. And the Covid recession of 2020 lasted just two months, the shortest downturn on record.
There is a possible bright spot. The US housing market is expected to slow despite concerns about rising prices and rising mortgage rates, but not the crash seen during the subprime crisis of 2007-2008.
Executives from companies including construction equipment giant Deere (DE), home improvement retailers Home Depot (HD) and Lowe’s (LOW), and equipment maker Whirlpool (WHR) have confirmed in conference calls that short-term slacking in demand for housing is likely, another massive burst an Bubble doesn’t seem to be in sight.