Market Insider

FedEx Earning Weakness Could Sound Alarm on Earnings Season


FedEx’s earnings report Tuesday will serve as a reminder that earnings growth has slowed and in some cases, is in decline.


The largest air cargo shipper reports its fiscal first quarter, 2013 earnings ahead of the market open Tuesday, and it has already warned that the decline in the global economy and manufacturing activity is hurting its profits. The company said earlier this month that the quarter’s earnings were below reduced expectations. The company is viewed  as a bellwether for the economy, as it transports everything from car parts and financial documents to holiday gifts. Analysts expect it to earn $1.40 per share for the quarter ended Aug. 31, down from $1.46 per share last year.

The report is one of just a handful of earnings reports this week, as most companies are on a fiscal Sept. 30 quarter and will start reporting in early October. But it is around now when companies start commenting on their third quarter performance. Some analysts see the earnings season as one of the next things on the horizon that could trip up the stock market’s rally, with the S&P 500 now up 16.2 percent year-to-date.

“I think they’ll (earnings) disappoint on the manufacturing side and those tied to emerging world growth,” said James Paulsen, chief investment strategist at Wells Capital Management. “I also think we’re going to be disappointed on the international, and we’re going to be somewhat surprised by the domestic side. Personally unless the numbers get really bad, I just don’t think it’s a big deal. It’s really going to be more about the economy and what (jobless) claims are doing now and what about next quarter.”

Earnings for the S&P 500 are expected to decline this quarter after a slight gain last quarter.

“The most recent estimate is a decline of basically 2 percent” for S&P 500 profits this quarter, said Sam Stovall, chief equity strategist at S&P Capital IQ. “We’ve had a very sharp deceleration of earnings that will likely end up troughing in third quarter with that roughly 2 percent decline, but then Wall Street is looking for a recovery of 10 percent in the fourth quarter, and 6.5 percent in the first quarter, 2013, which seems to go along with GDP estimates.”

Some analysts see those fourth and first quarter estimates as too rosy and expect them to come down, causing some bumps for stocks in the process.

But just because earnings are slowing, it doesn’t necessarily mean the stock market will take a beating. Paulsen said stocks do not always follow the same pattern as earnings, and in the past the market has priced in earnings growth, after the fact. He said the market is entering this period of “getting paid” for past earnings performance, where earnings can trend sideways yet the stock market rises.

Stovall notes earnings are up 155 percent from the trough of September, 2009, but the stock market has doubled from its bottom in March, 2009. Stocks are also trading on a price earnings ratio of  14.5 on trailing 12-months operating profits, while the median p/e since 1988 is 17.9 percent. “Right now we’re trading at a 19 percent discount to that long-term median p/e,” said Stovall.

Stovall said he believes the market prices in the economy six months in the future, and earnings nine months in the future. “So maybe with the start of the new year, we start to get reports on the fourth quarter and we will start to see better earnings then in the third quarter,” he said.

What Else to Watch

Besides FedEx earnings, there is current account data at 8:30 a.m. ET, and Treasury international capital flows data at 9 a.m. The National Association of Home Builders sentiment index is released at 10 a.m.

There are also several Fed speakers, including New  York Fed President William Dudley, who speaks on the national and regional economy at 11:30 a.m. He gives the same speech at 4:30 p.m. Richmond Fed President Jeffrey Lacker speaks at 6:15 p.m.

Apple , riding the success of its two million first day iPhone 5 sales, crossed $700 for the first time after the bell Monday, and it will be a stock to watch again on Tuesday.

The energy market is also a focus, after WTI crude plunged in the hour before the market close Monday. Oil fell as a rumor circulated that the White House would release oil from the Strategic Petroleum Reserve, but the White House later said it made no changes, affecting the SPR. Oil fell $2.38 per barrel to $96.62, its biggest one-day drop since July 23.

Oil had moved higher with stocks and other risk assets on the Fed’s announcement that it would buy $40 billion in mortgage securities a month. “It’s not a one way trade for oil off QE. It’s going to react to this diminishing demand environment. That’s why the Fed’s doing QE3 — because the economy is weak,” said John Kilduff of Again Capital.

Follow Patti Domm on Twitter: @pattidomm

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