Why Ford is pulling the entire stock market down on Tuesday?

Stock market investors got a nice breather on Monday, as Wall Street was able to regain some of the ground it had lost the previous week. On Tuesday morning, however, it looked like the rebound could be short-lived as futures contracts on the Dow Jones Industrial Average (^DJI 0.00%), S&P 500 (^GSPC 0.69%)and Nasdaq composite (^IXIC 0.00%) had fallen by three-quarters percent an hour before the start of the regular trading session.

The Federal Reserve has been aggressive in its efforts to tighten monetary policy and raise interest rates in order to control inflation. Consumers around the world feel that prices are higher for the goods and services they need, but it hasn’t always been clear what impact inflation has had on the business world. That became a lot clearer on Tuesday morning after Ford Motor Company (F 1.43%) gave details of how the current macroeconomic environment is straining its auto business.

What Ford said?

Shares of Ford fell nearly 5% in premarket trading as investors digested what the auto giant said about its likely financial performance for the third quarter of 2022. While not all of the news was bad, investors still had to adjust some of their expectations about what Ford’s results may look like for the rest of the year and beyond.

Ford has suffered from supply shortages of key components for some time, and those supply chain challenges continue to hurt the company. The automaker expects to build between 40,000 and 45,000 high-margin trucks and SUVs based on “wheeled vehicles,” holding them back until Ford receives the parts needed to complete them. Once those parts come in, Ford plans to send them to dealers for sale, but with delays pushing those deliveries into the fourth quarter.

In addition, suppliers complain about the increased costs they face when releasing vital parts and components. As a result, those suppliers have negotiated with Ford to try to pass on some of their increased costs to the automaker. As a result, Ford estimates that its supplier costs will be about $1 billion higher than it expected to pay.

Ford therefore expects adjusted pre-tax income to be between $1.4 billion and $1.7 billion. That’s lower than its earlier forecast for the quarter, but Ford was adamant it didn’t change its full-year projections for between $11.5 billion and $12.5 billion in adjusted pre-tax income.

Can Ford overtake?

The implication in Ford’s forecast is that the automaker hopes to have all of its financial pressures released by the end of 2022. Ford is optimistic that supply chain issues will only lead to slowed operations rather than lost customers.

Given the recent tightness in the auto markets, Ford’s optimism may be justified. With consumers waiting weeks or even months for the cars and trucks they want in stock, it’s reasonable to think that a hungry consumer market could absorb 40,000 to 45,000 additional vehicles, even by the end of a model year when most auto dealers are running out of stock. search for inventory clearing to make room for newer vehicles.

However, the wildcard is whether inflation will hurt consumers’ ability to continue buying cars and trucks at the same rate. Even with the recent drops in gasoline prices, many people don’t have that much discretionary income to afford a car upgrade right now. Higher interest rates can increase the cost of consumer debt and deprive potential buyers of even more money.

If Ford continues to see customers flocking to its dealerships, the prediction that it will weather supply chain storms could prove investors wrong about Tuesday’s drop in its share price. But if inflation hurts its customers, Ford could have a problem in the longer term.

Dan Caplinger has no position in any of the listed stocks. The Motley Fool has no position in any of the listed stocks. The Motley Fool has a disclosure policy.


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