The Dow Jones Industrial Average (INDEX: ^DJI ) has certainly had its share of ups and downs so far in 2012, with huge performance in the first quarter followed by considerable volatility in the second quarter. With the average approaching new highs again, though, it's a good time to take a look at where the 30 stocks in the Dow may go from here.
All but one of the Dow stocks have reported earnings already, and there've been many favorable reports from Dow-component companies. Let's look at some of the best positive surprises.
The top performers
Analysts have been somewhat nervous about earnings season this time around. With the bull market getting somewhat long in the tooth, the favorable earnings comparisons from recession-stricken periods are now a thing of the past, and you can no longer take big year-over-year earnings growth for granted.
Nevertheless, some impressive beats have contributed to a favorable second-quarter earnings season. According to Yahoo! Finance, 25 Dow stocks beat earnings estimates, while one matched expectations and only three fell short.
You can bank on it
Some of the biggest surprises have come from financial stocks. JPMorgan Chase positively crushed its earnings estimates this quarter, beating analyst estimates by a whopping 70% as fallout from the London Whale trading incident wasn't enough to offset gains elsewhere. Even with a $4.4 billion write-off stemming from the incident, investors are already looking past the one-time event in an effort to establish whether the bank's fundamental situation is improving.
Meanwhile, Bank of America (NYSE: BAC ) also posted a 35% earnings beat. Yet when you turn the clock back to the second quarter of 2011 and look past the bank's reported loss, you'll notice that earnings net of a one-time mortgage-related expense were actually much higher than the $0.19 per share that the bank posted this year. With returns on assets and equity that were just barely positive, B of A has a lot of work to do if it wants to recover any of its inherent strength from before the mortgage meltdown.
Expectations for banks have been relatively low in the aftermath of Wall Street's many challenges. At some point, though, banks will have to stand on their own two feet, and at that point, comparisons may get a whole lot harder.
If you build it, earnings will come
Another area of strength for the Dow in the second quarter came from manufacturing. United Technologies (NYSE: UTX ) , Boeing (NYSE: BA ) , and Caterpillar (NYSE: CAT ) all came through with double-digit percentage beats versus analyst expectations.
For United Technologies, the news came as the company finally closed on its acquisition of Goodrich. Looking forward, the conglomerate should be able to take advantage of the strong environment for commercial aircraft to bolster its own business. Despite concerns about government spending, deals like the one United Tech's subsidiary Sikorsky Aircraft finalized with the U.S. military should give the company several years of stable earnings.
Boeing, meanwhile, has even brighter prospects, as long as it can actually deliver on them. Aircraft orders have been flooding in, but the big concern is whether a big order backlog will translate into actual revenue. Given the company's challenges in keeping production schedules on track in the past, investors are rightly concerned that Boeing needs to improve on its execution if it expects to take full advantage of its leadership in the commercial aircraft industry.
Finally, Caterpillar has seen its stock sag on fears of a slowdown in China. Yet the most surprising aspect of Caterpillar's success has been its positive results from within North America. With many companies writing off the domestic market, Caterpillar has clearly identified profit opportunities close to home, and so far, it's proved to be a winning strategy.
Time to look ahead
Overall, investors should be reasonably happy about the second quarter's earnings season. But with investors bidding up the stock market toward new highs, hopes for the third quarter are understandably high. Anything less than perfection could prove extremely disappointing for shareholders. For now, though, we'll just have to see how things go between now and October, when the next earnings season begins.
All that said, don't fret too much about quarterly results. A long-term mindset will serve you better. Let me suggest you look at The Motley Fool's special report on retirement investing and start thinking in terms of decades instead of days. Get your free report today!
Meanwhile, we have even more information on two key Dow components. Get the thinking of our top analysts in the Fool's premium reports on Bank of America and Caterpillar.