The Trump economy is slowing down by most measures — perhaps quicker than many investors think — under the weight of the heightened U.S. trade war with China.
And now some big name companies, JetBlue (JBLU) and Starbucks (SBUX), are calling attention to it in their own unique ways, even if they won’t utter the words “trade war” explicitly. Investors should take heed of these new warnings — and the market’s reaction — just weeks removed from the start of third quarter earnings season.
In a more formal U.S. Securities and Exchange Commission filing Wednesday, airline JetBlue slashed its third quarter revenue per available seat mile outlook. RASM, as its known in the airline industry, is a key measurement of profitability.
JetBlue — often viewed as a proxy on global consumer and business spending — now sees RASM unchanged to declining 2% in the third quarter. Previously, the company modeled for growth of 0.5% to 3.5%. JetBlue said softer bookings in Puerto Rico and “weaker demand trends” across its business led to the downward revision.
It’s hard to imagine that absent the trade war, JetBlue would be issuing a sales guidance cut given where we are in the economic cycle (things were good...).
JetBlue shares tanked 4.5% on the warning.
Meanwhile over at Starbucks, the company took a less formal approach Wednesday warning Wall Street of rising risks to its business in the months ahead. The coffee giant revealed in a presentation at Goldman Sachs that for its upcoming fiscal year, it expects earnings growth “below” its longterm outlook of at least 10%. Starbucks reiterated its 16% earnings growth target for its current fiscal year, which ends September 30.
Analysts expected about 11% earnings growth from global consumer bellwether Starbucks this fiscal year. Starbucks shares dropped 2% on the news.
For its part, Starbucks pins the guidance surprise on a higher effective tax rate and “more normalized” amount of share repurchases.
“But again, I want to reinforce that our growth-at-scale agenda is delivering against our expectations. I would say that we’re firing on all cylinders from an operating performance perspective with the focus and discipline necessary to drive growth at scale for a company like Starbucks and our long-term double-digit EPS growth model is fully intact,” Starbucks chief financial officer Pat Grismer told those at the conference.
Prudential Financial Chief Market Strategist Quincy Krosby says warnings from Starbucks and JetBlue suggest volatile trade conditions are beginning to take their toll on Corporate America. That tightening rope around the neck of big companies is a major risk to earnings estimates for the third and fourth quarters, Brown Brothers Harriman strategist Scott Clemons believes.
Wall Street at large may be warming up to that view as well.
“If estimated growth hasn't fallen enough, we are now entering the period when companies really cut numbers and this year looks set to be even worse. The big question is whether or not the stocks that are washed out will see prices head much lower from here,” warns Jefferies strategist Steven DeSanctis.
DeSanctis’ research shows earnings for large cap companies may drop 1% this year but then re-accelerate to 9% growth in 2020. But given the state of the U.S. versus China trade war, both projections may not reflect what companies will likely report.
Think more downside risk... as Starbucks and JetBlue just hinted.