- Various macro forces appear to be affecting airline stocks to a greater degree than other sectors today
- This selloff has seen the top three U.S. airlines drop significantly today
- Investors appear to be less enthusiastic about margins for consumer-facing companies moving forward
Airlines are one of the various sectors taking a hit today. Top airline stocks United (NASDAQ:UAL), Delta (NYSE:DAL) and American (NASDAQ:AAL) are all down considerably today. As of this writing, each of these companies are down between 5% and 8%.
Some might call this selling pressure indiscriminate. Today, it certainly feels like that is the case. However, there are a number of factors investors appear to be pricing in right now.
For airlines, fuel costs are a large component of the cost structure. With jet fuel surging of late, profitability concerns amid margin pressures appear to be ratcheting up for this sector.
These concerns have been amplified by poor earnings results from retailers. These results showed weakening consumer demand for certain higher-priced goods. This could suggest the travel boom we’ve seen may be short-lived.
Additionally, rising interest rates and this macro environment provide a broad-based headwind affecting all stocks. When interest rates go up, valuations tend to compress. Such is the case with these top airline stocks.
Let’s dive into where investors may want to go from here.
Airline Stocks: Buy, Hold or Sell?
There’s certainly a bull thesis still floating out there around airline stocks. Bookings remain high, and ticket prices have surged, offsetting many of the increasing costs airlines are seeing. On the margin, this should make for a strong quarter or two in the books.
That said, rising employee and fuel costs, combined with what could be weakening demand in the latter half of this year, is providing a strong bear argument for the sector right now. Recession worries are ramping up. Indeed, in many respects, these concerns are well-founded, given the pace at which the Fed is tightening.
Ultimately, I think airline stocks are a bet on whether we’ll see a recession this year or not. Today’s price action certainly makes airline stocks look more like options on this binary outcome.
Thus, whether these top airline stocks are a buy, hold or sell ultimately depends on one’s view of where the economy will be in 12 months. With so much uncertainty right now, it appears investors are taking the cautious route.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
