Warning: S&P 500 Nearing a Top
As the S&P 500 continues marching higher, all eyes will be on corporate earnings for the next quarter and the rest of the fiscal year. While much of the move in the S&P 500 can be related to the Federal Reserve’s easy monetary stance, ultimately, corporate earnings need to rise to justify current price levels.
One company that is quite involved in not only the American economy but also the global economy is FedEx Corporation (NYSE/FDX). The latest corporate earnings report by FedEx indicates that perhaps the underlying economy is not as strong as many people believe.
FedEx reported a 31% decrease in corporate earnings for the third quarter. It is interesting to note that international export volume did increase during the quarter by four percent; however, a large number of shippers moved away from priority services to cheaper options. (Source: Morris, B. and Sechler, B., “FedEx Customers Like Slower and Cheaper,” Wall Street Journal, March 20, 2013.)
While revenues did increase, the hit to corporate earnings is an indication that other companies don’t see a large amount of end-user demand building up. The reason I say this is because if you were a business and had a large number of clients, you would be willing to pay for priority shipping to ensure the sale. However, with a growing number of businesses choosing the cheaper options, this tells me that demand is not as strong as many believe.
FedEx is a company that deals with many of the S&P 500 firms, and this could be an early sign that corporate earnings might be weaker than expected for the next quarter.
To combat shifts from higher-priced services to lower-cost options, FedEx is now contemplating additional cost-cutting measures. When a company that is so closely associated with both the American and global economies continues to cut costs, while also dramatically lowering corporate earnings, this is a warning sign that perhaps other S&P 500 corporations are also suffering from a lack of corporate earnings growth.
Chart courtesy of www.StockCharts.com
Following the news of the drop in corporate earnings, shares of FedEx sold off dramatically. Even following this sell-off in the market, shares of FedEx are still up substantially for the year.
This is the basic story for most S&P 500 companies. The broader market has moved ahead of growth in corporate earnings, and it’s highly possible that share prices will stagnate, along with corporate earnings, next quarter.
While not every company needs to use priority shipping, this metric is still of some importance as an indicative sign that many S&P 500 companies are not seeing a dramatic pickup in demand. This information tells me that urgent growth isn’t occurring.
Considering how high the S&P 500 is, many investors are sitting on large profits and will most likely begin to start taking some money off the table. I believe a lot of the move in the S&P 500 has been related to liquidity provided by the Federal Reserve, not a substantial increase in corporate earnings.
This corporate earnings report by FedEx should be a warning sign to investors that the S&P 500 companies might be pricing in overly optimistic corporate earnings. I believe the risks to the downside, at this point, are much larger than the upside potential for the S&P 500.