The Inflation Stock Market Faces: An Economy in Flux
Oct 25, 2023
In reality of zooming inflation and a fluctuating stock market, investors are struggling with an economy that seems to disregard conventional wisdom. As the financial markets move with uncertainty, a closer look at recent earnings reports from General Electric (GE), Raytheon Technologies (RTX), and General Motors (GM) provides intriguing insights into the economic anomalies of our times.
General Motors Contradicts Expectations
General Motors, an iconic American automaker, recently reported robust vehicle sales, with 981,000 units delivered in the third quarter. This marks an increase from the second quarter and a substantial rise from the same period in 2022. However, the fact that car sales are rushing in an environment of a slowing economy and rising interest rates is, indeed, an abnormal development. Post-pandemic car sales in 2023 are expected to be approximately 15 million units, significantly lower than the 17 million units sold in pre-pandemic times. Strangely, GM is earning less on higher car sales, with a decrease in operating profit compared to the previous year, defying conventional expectations that profits tend to peak with increased sales.
Aerospace in a Post-pandemic Boom
On the other hand, General Electric (GE) has witnessed a wave in orders for its jet engines and related services, reporting a 34% year-over-year increase. This is notably occurring in a period when the broader economy is slowing down. Despite the pandemic’s impact on commercial air travel, GE’s aerospace profit margins remain exceptionally strong, surpassing 20%. This strength is somewhat unusual since, during a boom, margins tend to be affected due to the increased costs associated with manufacturing new engines. The industry norm involves selling new engines at a cost or a loss while making profits from parts and services.
Supply Chain Issues Influence Aerospace Profits
One reason for GE’s robust margins is the ongoing supply chain challenges affecting Boeing and Airbus. Both companies are struggling to boost production, with deliveries not expected to reach pre-pandemic levels until 2025. This has resulted in more demand for spare engines and parts, contributing to higher profits for GE. These unique dynamics in the aerospace industry have created a notable contrast between GE and its competitor, Raytheon Technologies (RTX), which has faced quality issues with one of its jet engines, leading to lower operating profit margins.
Investment Strategies in an Unpredictable Economy
Amid this economic backdrop, investors may find it challenging to follow traditional investment strategies. However, there are still sensible approaches to consider. Buying quality companies at reasonable prices remains a fundamental principle. Aerospace, historically a reliable sector, offers investment opportunities, especially when looking at earnings projections for 2025 or 2026. Both GE and Boeing are trading at around 15 to 16 times estimated earnings for 2026, while RTX is trading at ten times. These valuations, when compared to 2018 levels, suggest reasonable investment potential.
Auto Industry: Transition to EVs
In contrast, the auto industry faces a unique set of challenges in inflation stock market as it undergoes a transformative shift towards electric vehicles (EVs).
Traditional automakers are expected to experience stress in the coming years as they adapt to this transition. Nicholas Colas, co-founder of DataTrek Research, advises that auto stocks should be viewed as trades rather than long-term investments. Investors should consider buying when demand appears weak and selling when it boosts. Despite the challenges, GM’s stock price, currently trading at less than five times estimated earnings, reflects concerns related to rising interest rates and labour disputes.
In a world where economic norms are being rewritten, investors are confronted with a strange and explosive reality. The earnings reports from GE, RTX, and GM offer valuable insights into the unique dynamics of the current economy. While traditional strategies may not always apply, investors can still navigate this unpredictable sector by focusing on quality, reasonable pricing, and adapting to the evolving trends in various industries. The economic situation and the inflation stock market faces is indeed a wild and unpredictable beast.