Will UPS be the next to issue a warning?

FedEx Corporation (NYSE: FDX) sent shockwaves through the stock market by posting a big shortfall and scrapping forecasts due to "deteriorating" economic conditions. On the heels of a weak retail sales report in August, the warning signaled that the US economy (and potentially equities) could face a tough winter.

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While the 33% EPS loss was a shock, in some ways we should have seen it coming. Online shopping behaviors have been moderating for some time now, as weary shoppers return to physical stores and hit the “add to cart” button with less fervor than during the pandemic. Businesses have taken a cautious stance on spending in 2022 and, as a result, have amplified the slowdown in consumer demand. Finally, cost inflation compounded FedEx's woes, including fuel expenses.

Since FedEx is seen as an indicator of economic activity, the ripple effects of the warning go well beyond the transportation sector. Aside from e-commerce, this suggests that inflation has a deeper impact on consumer and business confidence. Soaring interest rates designed to tame inflation could make matters worse, allowing fewer Americans to get mortgages, car loans, and pay off credit card debt.

Is there a ray of hope for the transport industry?

All may not be catastrophic. FedEx rival United Parcel Service, Inc. (NYSE:UPS) painted a less bleak picture when it reported second-quarter results. The company managed to beat Wall Street earnings estimates and deliver 8% year-over-year earnings growth. FedEx's net income was down 21%.

Best of all, UPS reaffirmed its guidance for 2022 and tripled its share buyback program target to $3 billion. The dividend was also increased by 49%, giving Big Brown a sizeable forward yield advantage over FedEx (3.8% vs. 3.2%).

Will the real shipping and logistics indicator rise?

To be fair, UPS results cover the three-month period ending June 30. FedEx's first quarter fiscal bombshell extended through the end of August. So when UPS reported, the macro outlook might not have been so dire. Which begs the question…

Will UPS issue a FedEx type warning?

The contrast in tone between the UPS and FedEx updates may very well be reconciled in the coming weeks. Given that it faces the same demand and cost pressures as FedEx, it would be surprising if UPS didn't dampen its enthusiasm for future growth before or during its Oct. 25 report.

A less desirable scenario for UPS shareholders would be if UPS management reduced its growth forecasts or backtracked on its takeover ambitions. This summer, UPS forecast revenue of $102 billion in 2022, which would represent about 6% growth from 2021.

Coincidentally, this happened on the eve of the Fed's rate hike in July, which was followed by the 0.75% double hike that month. This suggests that economic uncertainty has since been high and upcoming UPS announcements may not come with such optimism.

If there's one thing UPS has going for it that FedEx doesn't, it's a new CEO who has brought the company to life. Former Home Depot chief financial officer Carol Tome took the leadership reins last year and has won praise for guiding UPS through the current economic climate. This kept the company's EPS beat streak at eight quarters.

Whether the new management team can continue to exceed expectations largely depends on U.S. consumers. The extent to which people choose to spend this holiday shopping season will likely have a profound impact on UPS performance, not to mention the market's view of consumer health. Meanwhile, the recent escalation of the Russian-Ukrainian war threatens to rekindle energy prices just when they have calmed down.

Is FedEx or UPS the best stock to own?

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