RXO: Underlying Demand Still Remains Weak; Reiterate Hold

The U.S. truckload market in 2025 remains a study in contradictions. On one hand, it is a market defined by technological innovation, data-driven insights, and the relentless pursuit of efficiency. On the other, it is a sector grappling with structural headwinds that have persisted for years: weak demand, a fragile carrier base, and regulatory uncertainty. For investors, the question is not whether the market will recover, but how it will adapt—and whether companies like RXO Inc. (NYSE: RXO) can navigate these challenges without sacrificing long-term value.

A Market in Equilibrium

The truckload market has settled into a prolonged equilibrium, where weak demand and constrained capacity coexist in a fragile balance. Freight volumes remain below pre-pandemic levels, with industrial and consumer sectors showing muted growth. Spot rates, while up 6.5% year-over-year in Q2 2025, have failed to sustain momentum, and contract rates have risen only modestly. This environment reflects a shippers' market, where carriers are forced to prioritize margin protection over volume expansion.

Structural challenges compound the issue. Diesel prices, up sharply in 2025, have eroded carrier margins, while the driver shortage—now over 80,000 drivers—continues to constrain capacity. Regulatory headwinds, including the EPA's 2027 emissions standards and the One Big Beautiful Bill Act, add further uncertainty. These factors create a landscape where carriers are hesitant to invest in new equipment or expand operations, even as shippers demand reliability.

RXO's Financial Performance: A Mixed Bag

RXO's Q2 2025 results highlight the tension between operational resilience and market headwinds. Revenue of $1.4 billion met expectations, driven by strong performance in complementary services (22.8% gross margin) and the Last Mile segment (17% year-over-year stop growth). However, earnings per share (EPS) of $0.04—81.82% below forecasts—exposed the fragility of the company's profitability. Adjusted EBITDA of $38 million, while at the high end of guidance, masked a broader trend: the brokerage segment's 14.4% gross margin, down from 17.8% company-wide, underscores the pressure on core truckload operations.

The automotive sector's decline, which cost RXO over $10 million in gross profit year-over-year, is emblematic of the market's challenges. While RXO's LTL segment grew 45% in Q2, this growth was offset by a 12% drop in full-truckload (FTL) volume. The company's ability to leverage technology and data—such as its Curve index—has improved procurement efficiency, but these gains are not enough to offset the broader economic drag.

Strategic Positioning: Strengths and Risks

RXO's acquisition of Coyote Logistics in September 2024 has bolstered its market position, making it the third-largest full-truckload broker in North America. This scale has enhanced its data capabilities and operational reach, but it has also exposed the company to the same structural risks facing the industry. For example, the integration of Coyote's operations has improved productivity (45% improvement over two years), yet carrier attrition and regulatory shifts threaten to undermine these gains.

The company's focus on complementary services—managed transportation, last-mile delivery, and freight forwarding—offers a glimpse of resilience. These segments, with higher margins and less exposure to volatile freight markets, are growing at double-digit rates. However, they remain a smaller portion of RXO's overall business, and their ability to offset truckload underperformance is limited.

Investment Implications: Reiterate Hold

For investors, RXO's story is one of cautious optimism. The company's strategic investments in technology and its expanded scale position it to outperform in a shippers' market. Its complementary services and Last Mile growth are promising, and its adjusted EBITDA conversion of 58% demonstrates strong cash management. However, the structural challenges—weak demand, rising costs, and regulatory uncertainty—remain unresolved.

The key risk is that the market's equilibrium persists longer than expected. If freight volumes fail to rebound and carrier capacity continues to contract, RXO's ability to grow EBITDA will be constrained. While the company's Q3 guidance of $33–43 million in adjusted EBITDA suggests confidence, this range is modest compared to pre-pandemic levels.

Moreover, the stock's performance—down 35.2% year-to-date and trading near its 52-week low—reflects investor skepticism. A beta of 1.55 indicates higher volatility, and while the stock is considered slightly undervalued by some metrics, the path to value realization is unclear. Analysts' target price range of $11–$21 is wide, reflecting divergent views on the market's trajectory.

Conclusion: Patience and Prudence

RXO's management team has taken the right steps to adapt to a challenging environment. Its focus on technology, cost discipline, and complementary services is a sound strategy for the long term. However, the structural headwinds in the truckload market—weak demand, regulatory uncertainty, and a fragile carrier base—mean that the company's growth will remain uneven.

For now, a Hold recommendation is appropriate. Investors should monitor key indicators: the pace of capacity contraction, the impact of the One Big Beautiful Bill Act, and RXO's ability to maintain EBITDA growth. Until the market shows signs of a more sustained recovery, the risks of overcommitting to RXO outweigh the potential rewards. In a sector defined by equilibrium, patience is the investor's greatest asset.