Will The Macroeconomic Factors Continue To Weigh On PepsiCo Stock?

PepsiCo (NYSE: PEP) recently released its fiscal first-quarter results, revealing a mixed performance against Wall Street expectations. The company reported revenues of $17.9 billion, slightly exceeding the anticipated $17.8 billion, but earnings per share (EPS) of $1.48 fell marginally short of the $1.49 consensus. These figures represent a 2% year-over-year decrease in sales and an 8% drop in earnings, signaling a complex start to the fiscal year.

Following this report, PepsiCo’s stock experienced a 3% decline on Thursday, April 24th. This downturn appears to be partly fueled by a less optimistic outlook for the remainder of the year. While the company projects low single-digit organic revenue growth, it has revised its earnings outlook downward to flat year-over-year, a significant shift from the previously anticipated mid-single-digit increase.

A deeper look into PepsiCo’s organic business performance reveals a 2% decline in volume, offset by a 5% increase in pricing. Geographically, the company experienced softness in North American consumer demand but benefited from robust international sales growth.

Now, of course, individual stocks are more volatile than a portfolio – and in this environment if you seek upside with less volatility than a single stock, consider the High-Quality portfolio, which has outperformed the S&P 500 and achieved returns greater than 91% since inception.

Pixabay

Broader Market Concerns and Tariff Implications

Beyond PepsiCo’s specific earnings, the current macroeconomic climate presents significant headwinds. Rising economic concerns in the United States, exacerbated by the current administration’s implementation of tariffs, are creating an unfavorable environment for the broader markets. It’s unlikely that any major stock, including PepsiCo, will remain entirely insulated from these conditions.

Historical Resilience of PEP Stock During Downturns

Historically, PepsiCo’s stock has demonstrated a degree of resilience during economic downturns, often outperforming the benchmark S&P 500 index in terms of percentage decline. Examining recent crises provides valuable context:

• Inflation Shock (2022): During the inflationary pressures of early 2022, PEP stock saw a 12.5% drop, compared to a more significant 25.4% decline in the S&P 500. Notably, the stock fully recovered its losses within a few months.
• COVID-19 Pandemic (2020): The onset of the pandemic triggered a 29.3% fall in PEP stock, less severe than the S&P 500’s 33.9% decline. Again, the stock rebounded to its pre-crisis peak relatively quickly.
• Global Financial Crisis (2008): The financial crisis led to a 42.4% decrease in PepsiCo’s stock value, while the S&P 500 experienced a steeper 56.8% drop. The recovery period for PEP stock was longer in this instance.

Despite this historical outperformance, the current confluence of a soft demand environment and tariff-related uncertainties warrants careful consideration. PepsiCo’s year-to-date stock decline of 7% already reflects investor apprehension.

Key Factors Influencing Future Performance

Several factors contribute to the current cautious outlook:

• Macroeconomic Headwinds: While inflation concerns have eased somewhat, the current administration’s aggressive tariff policies have reignited anxieties about potential economic turbulence.
• Geopolitical Uncertainty: Heightened geopolitical instability, including the ongoing trade tensions, and strained international relations, adds complexity to the risk landscape. Consumer spending, a crucial driver for PepsiCo’s business, could be negatively impacted by further market deterioration. 
• Mixed Performance Metrics: While PepsiCo has achieved moderate revenue growth (averaging 5% over the past three years) and maintains a moderate operating margin of 14%, the recent quarterly results highlight the challenges of balancing volume declines with pricing power in the current environment. The continued market share gains in Pepsi Zero Sugar in North America offer a positive sign, but the broader economic context cannot be ignored.

Potential Downside Risk and Investor Considerations

Considering the 2020 market sell-off as a potential benchmark, a similar percentage decline (around 30%) from PepsiCo’s earlier highs this year could push the stock to levels below $110.

This raises a critical question for investors holding PEP stock: In the event of a significant market downturn pushing the stock towards or below $110, would you maintain your position or be inclined to sell? Understanding your risk tolerance in the face of potential volatility is paramount in the current uncertain economic climate.

Holding on to a falling stock is not always easy. Trefis works with Empirical Asset Management– a Boston area wealth manager, whose asset allocation strategies yielded positive returns even during the 2008/2009 timeframe, when the S&P lost more than 40%.

Empirical has incorporated the Trefis HQ Portfolio in this asset allocation framework to provide clients better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.

While investors have their fingers crossed for a soft landing by the U.S. economy, how bad can things get if there is another recession? See the last six market crashes compared.

Invest with Trefis Market-Beating Portfolios

See all Trefis Price Estimates