Deere Falls Sharply as Industrials Weigh on Wall Street

Stocks tried to mount a rally to start Friday’s trading session, but the gains didn’t last long. By early afternoon, Wall Street was seeing sizable losses, with the S&P 500 (^GSPC 0.01%) coming closer to a 20% decline that would signify a bear market in many investors’ eyes. As of 12:45 p.m. ET, the Dow Jones Industrial Average (^DJI 0.03%) was down 417 points to 30,836. The S&P dropped 64 points to 3,836, and the Nasdaq Composite (^IXIC -0.30%) fell 274 points to 11,115.

Most big companies have reported their earnings for the first part of 2022, but there are still some stragglers that are weighing in and offering a view of what certain parts of the economy look like right now. Deere (DE -14.07%) is a well-known manufacturer of heavy equipment, and it has its fingers on the pulse of the industrial sector. Deere announced its financial results this morning, and despite showing signs of strength, investors weren’t impressed, and the stock fell sharply.

Image source: Getty Images.

Deere in the headlights

Shares of Deere were down almost 14% on Friday afternoon. The equipment manufacturer’s business seemed to hold up reasonably well, but shareholders had apparently wanted to see more from the company.

Deere reported that revenue in its fiscal second quarter ending May 1 rose 11% to $13.37 billion. Net income was up 17% to $2.10 billion, and that produced earnings of $6.81 per share.

The company cited robust market conditions and industry fundamentals that it believes should help support ongoing strength. Despite somewhat sluggish performance in its small agriculture and turf segment, Deere was able to produce solid gains in sales and operating profit in its production and precision agriculture business. Moreover, the construction and forestry segment was the standout performer, with operating profit soaring 66% on a combination of higher shipment volumes and better price realizations.

Deere even boosted its net income guidance for the full 2022 fiscal year, now anticipating $7 billion to $7.4 billion on the bottom line. Yet even with shares that are priced at reasonable levels and despite calls for ongoing growth, the stock lost ground.

Worries about recession

The apparent disconnect between what Deere said about its prospects and the move in its stock price gets clearer when you put it into the broader macroeconomic context, at least as many investors are seeing it right now. Rising interest rates are designed to slow down the economy, and if customers don’t have as much capacity to purchase more equipment for their farms and other needs, then Deere can expect to see a reversal in the strong demand that has helped its business lately.

Indeed, that theme is dominant across much of the entire industrial sector on Friday. The Industrial Select Sector SPDR (XLI -1.08%) was down more than 2%, underperforming the broader S&P as key components fell. In particular, aerospace giant and Dow component Boeing (BA -5.07%) was down 7%, as investors continue to fear that the economic fallout from ailing airlines could hurt longer-term demand to such an extent as to cause lasting damage to the aircraft manufacturer.

Unfortunately, it’ll take time to tell what impact current events will have on the industrial sector and the broader economy. For now, though, investors aren’t willing to put up with any uncertainty at all, and that’s what’s motivating steep declines in the markets.