The warning signs for an impending stock market correction are everywhere. While the major stock market indexes are at an all-time high, companies are laying off employees in droves to maintain profit margins. Inflation is creeping up, further straining already price-fatigued shoppers.

Until the federal government shutdown is over, we will not be able to see the most comprehensive data for employment and inflation. Until then, we must rely on the behavior of companies to tell us which way the economy is headed.

That’s why I took a close look at Kimberly-Clark’s (NSDQ: KMB) decision announced this week to acquire Kenvue (NYSE: KVUE). This total cost of this transaction is estimated at roughly $49 billion. That’s a lot to pay for a company that has seen its share price drop in half since being spun off from former parent company Johnson & Johnson (NYSE: JNJ) two years ago.

Put a Bandage on It

From a strategic perspective, buying Kenvue makes sense. Kenvue’s popular healthcare products will benefit from Kimberly-Clark’s marketing muscle. Kimberly-Clark’s CEO, Mike Hsu, justified the transaction thusly: “Over the last several years, Kimberly-Clark has undertaken a significant transformation to pivot our portfolio to higher-growth, higher-margin businesses while rewiring our organization to work smarter and faster.”

That may be so, but it may take a while before the financial benefits of those synergies outweigh the cost of acquiring them. The morning this deal was announced, KMB fell 15 percent to its lowest level since before the outbreak of the coronavirus pandemic nearly six years ago.

Presumably, one or more of Kimberly-Clark’s institutional shareholders decided to throw in the towel. Even before that big drop, KMB had gained no ground over the past five years as shown in the chart below.

In short, the opportunity cost of remaining in KMB while the rest of the stock market was on the rise became too much for some of them to rationalize.

Stop the Bleeding

This is not a case of rearranging the deck chairs on the Titanic. Neither Kimberly-Clark nor Kenvue are at risk of going out of business anytime soon. However, Kenvue’s third quarter net sales fell 3.5 percent during the past year while its adjusted/diluted earnings per share were flat.

Meanwhile, Kimberly-Clark’s fiscal 2025 Q3 results released last week reflect a business that is also struggling to gain momentum. Its net sales were flat while its gross margin contracted by 170 basis points (1.7 percentage points).

The only way this deal makes financial sense involves a lot of financial engineering. Based on Mr. Hsu’s statement, we can safely assume that Kenvue’s low-growth, low-margin businesses will be sold (if a buyer can be found) or shut down. Also, a meaningful number of Kenvue’s 22,000 employees will most likely be let go.

Full Recovery

As for why they are doing this deal now, it appears both companies recognized the futility of competing for investor dollars in the current financial environment. Wall Street has become addicted to the rapidly rising profits that artificial intelligence (AI) creates for the companies that benefit the most from it.

That is bad news for Kimberly-Clark and Kenvue, neither of which derives a substantial economic advantage from AI. Eventually, the incremental improvements to efficiency and productivity enabled by AI will diminish. As that happens, Wall Street will pare back its investments in tech stocks at an accelerating pace, triggering the aforementioned correction.

Assuming that does not happen for at least another six to nine months, Kimberly-Clark should have reorganized its balance sheet and made the necessary adjustments to costs to start growing its profits again. Its shareholders may have to remain patient for a while longer to see a positive return on their investment, but this move makes sense when viewed from a long-term perspective.