Until last week, the Dow was setting new records on a regular basis and inching tantalizingly closer to the landmark level of 20,000. However, its winning run has ended for now, with the index declining over successive sessions until a brief respite was provided by the presidential inauguration.
Meanwhile, earnings season will move into top gear this week, especially for the blue-chip index, with 30% of its components scheduled to announce fourth quarter results. With the focus squarely on earnings at this point, the nature of these releases is likely to determine the fortunes of the Dow in the days ahead.
Factors that Ended the Dow's Winning Streak
But first, why has the Dow lost out on much of the steam that it gained post the declaration of election results? Ever since the index closed tantalizingly near the 20,000 mark, the Dow has continued to move lower. Most of these gains were driven by the enthusiasm surrounding Trump's victory. Speculation that the new administration would bring about tax cuts, introduce fiscal stimulus measures and deregulate key sectors boosted markets upward.
However, profit taking was bound to ensue given that the Dow was overbought, according to several analysts and market watchers. Also, financials, which were the primary force behind the rally, fizzled after a strong bank rally ended. Notably, Goldman Sachs GS which had gained 35% between Nov 8 to Jan 6 has declined by 3.8% ever since. Additionally, it is important to consider that milestones like 20,000 are often a difficult barrier to break and may act as an impediment on stocks after a point.
Can Earnings Provide a Boost?
We now have Q4 results from 41 S&P 500 members that combined account for 12.5% of the index's total market capitalization. Total earnings for these 41 index members are up +11.3% from the same period last year on +3.9% higher revenues, with 70.7% beating EPS estimates and 46.3% coming ahead of top-line expectations.
For Q4 as a whole, total earnings for the S&P 500 companies are expected to be up +4.7% from the same period last year on +3.7% higher revenues. The Q4 growth pace has been steadily improving in recent days as companies, particularly banks, have been coming out with better than expected year-over-year growth. (Read more: Bank Earnings & the Trump Effect )
Of the Dow components, nine are expected to report earnings this week itself. Given such a trend, a series of earnings surprises could easily help the Dow return to its winning ways. The index has been trading within a narrow band for more than a month now and this could be a catalyst for further upside. On the other hand, a series of disappointments could act as a drag on the index.
Stocks to Watch for Earnings on Jan 24
Let's see what's in store for four Dow components expected to come up with third-quarter numbers on Tuesday, Jan 24.
Global science and technology company DuPontDD is expected to release its fourth-quarter 2016 results ahead of the bell on Jan 24.
In the third-quarter of 2016, DuPont logged forecast-topping earnings supported by its aggressive cost-reduction actions. The company saw improved operating margins across its business segments in the quarter.
However, an earnings beat for the Delaware-based company is unlikely this time around. This is because, as per our proven model, a stock needs to have both a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP to beat on earnings. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises.
For the quarter to be reported, DuPont has an Earnings ESP of 0.00%, while it carries a Zacks Rank #3. (Read more: DuPont (DD) Q4 Preview: Another Earnings Beat in Store? )
Simultaneously, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
DuPont Co. Price and EPS Surprise
DuPont Co. Price and EPS Surprise | DuPont Co. Quote
Johnson & JohnsonJNJ is also expected to release fourth-quarter ahead of the bell tomorrow. Coming to earnings surprise history, the healthcare heavyweight has a solid track record of earnings surprises, having beaten estimates over the last four quarters.
But things are likely to take a different turn on this occasion. This is because J&J has a Zacks Rank #3 and an Earnings ESP of -0.64% and our proven model shows that an earnings beat is uncertain this time around. (Read more: What's Ahead for Johnson & Johnson (JNJ) in Q4 Earnings? )
Johnson & Johnson Price and EPS Surprise
Johnson & Johnson Price and EPS Surprise | Johnson & Johnson Quote
U.S. telecom behemoth Verizon Communications Inc.VZ is slated to report fourth-quarter 2016 results, before the opening bell on Jan 24. Last quarter, Verizon posted an earnings surprise of 2.02%. Moreover, the company's earnings surpassed the Zacks Consensus Estimate in three of the previous four quarters, with an average beat of 1.06%.
However, things don't look particularly upbeat on this occasion. With a Zacks Rank #3 and an Earnings ESP of -1.12%, our proven model does not conclusively show that Verizon is likely to beat the Zacks Consensus Estimate this quarter. (Read more: Can Verizon (VZ) Pull Off a Surprise This Earnings Season? )
Verizon Communications Inc. Price and EPS Surprise
Verizon Communications Inc. Price and EPS Surprise | Verizon Communications Inc. Quote
The Travelers Companies, Inc.TRV occupies a strong market position in the property and casualty (P&C) industry. The stock has an impressive record of earnings surprises, having beaten estimates in three out of the last four quarters. In the third quarter, the company's earning beat the Zacks Consensus Estimate.
Travelers Companies carries a Zacks Rank #3 and has an Earnings ESP of +1.04%, making it a prime candidate for earnings beat this time as well.
The Travelers Cos. Price and EPS Surprise
The Travelers Cos. Price and EPS Surprise | The Travelers Cos. Quote
Other Releases Hold the Key
Of the four stocks we have examined now, only one has the attributes required for an earnings beat. The onus on resurrecting the Dow's fortunes now falls on the other stocks of the index scheduled to report releases over this week. This includes the likes of Boeing BA , Intel INTC and Chevron CVX and these releases will cumulatively have a major impact on market direction.
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Johnson & Johnson (JNJ): Free Stock Analysis Report
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E.I. du Pont de Nemours and Company (DD): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
