Fear of a recession has investors taking a "shoot first and ask questions later" approach as historically high inflation and rising interest rates overshadow company performance. That's according to analysts at CIBC who cut their price target on Air Canada (AC.TO) and upgraded Canada's largest railway in a series of revisions to the bank's equities coverage.
"The Q1 earnings season was another reminder that the murky outlook for the economy is more than offsetting good individual company stories," CIBC analysts led by Kevin Chiang wrote in a 55-page note to clients.
"We saw muted, and sometimes negative reactions to beats and raises as concerns over a recession have grown."
Last month, Walmart (WMT) and Target (TGT) shares plunged as rising comparable sales were overshadowed by higher costs in the first quarter of 2022. The U.S. retail giants are closely watched by economists for clues about how consumers are weathering inflation.
CIBC cut its price target for nine companies in total, lowering its outlook for Air Canada's stock to $30 per share from $35. The stock fell 2.07 per cent to $21.32 as at 2:10 p.m. ET on Friday, and has gained about three per cent year-to-date.
Canadian aircraft lessor Chorus Aviation (CHR.TO), auto parts manufacturers Magna International (MG.TO)(MGA) and Martinrea International (MRE.TO), and vehicle dealership group AutoCanada (ACQ.TO) were also among the companies that saw their price targets slashed.
"Looking back to the recessions in the early 1980s, early 1990s, early 2000s (impact of recession and 9/11), and the Financial Crisis, scheduled revenue passenger miles fell on average about five per cent, with the early 2000s seeing a seven per cent plus hit from pre-crisis levels to trough levels," Chiang wrote, citing U.S. aviation industry statistics.
The analyst added that auto sales have historically bottomed prior to an economic trough.
"Within our coverage, our pure-play auto suppliers do not show well given auto production is already running at suboptimal levels," he wrote. "A recession that results in further downside, coupled with elevated inflation, creates a meaningful headwind."
CIBC upgraded Canadian National Railway (CNR.TO) to an "outperformer" rating, with a price target of $167 per share. The bank says CN, and rival CP Rail (CP.TO)(CP), offer "defensive attributes in the event the economy tips into a recession" due to growing demand for Canadian potash, energy commodities, and grain.
The lender downgraded The Lion Electric Company (LEV.TO), which makes all-electric medium and heavy-duty vehicles, and Martinrea, from "outperformer" to "neutral." The analysts say long-duration growth names such as Lion Electric face challenges in a rising rate environment, and the downgrades for both companies reflect better expected returns elsewhere in the bank's universe.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.