UPS leads S&P 500 down after earnings disappoint
With rosy profit forecasts baked into present prices, misses will be painful
A 6.5% plunge in United Parcel Service shares after the corporate giant reported earnings at 1 pm Eastern Standard Time was the trigger for a general decline in the broad US market index.
The delivery service had its worst day in three years after it announced plans to spend an extra $7 billion on new planes and warehouses. Evidently the market believed that UPS could increase earnings on thin air. UPS told investors in a conference call that it expected a 2% to 3% increase in prices, not enough to persuade them about future earnings. E-commerce is a big contributor to UPS business, but it requires more spending.
There’s a parallel to the sharp fall in Germany’s DAX index earlier today led by Daimler Benz: the automaker announced that more spending on technology was required to maintain market share, and warned that 2018 profit growth would be modest. UPS needs planes to carry freight and automated warehouses, and the spending requirements are substantial. Investors have gotten so used to corporations raising profits in a low CapEx environment that they reacted with sticker shock to the cost of maintaining volume expansion.
A sharp rise in long-term interest rates didn’t help the S&P 500, either. The 30-year bond yield jumped by 8 basis points between 10 am, when a strong manufacturing report came out from the National Association of Purchasing Managers, to the US market close.
As Asia Unhedged said earlier today, equities have been trading off very generous earnings estimates, and any significant deviation from those estimates will be penalized severely.