Why the Dow Is Cratering

With earnings season now underway, the Dow Jones Industrial Average (INDEX: ^DJI  ) seems far from upbeat. Late in the trading session, the blue-chip index is down by more than 126 points, or 0.94%.

The decline comes amid a wave of ominous economic news. On Monday, the World Bank released updated predictions for growth in Asia. According to its report, output expansion in the Asia-Pacific region is expected to decrease from 8.2% last year to 7.2% this year. This report was followed on Tuesday by a similar take on the global economy from the International Monetary Fund which said, "Risks for a serious global slowdown are alarmingly high."

In addition, analysts and traders are concerned about downbeat corporate earnings. As I noted yesterday, a recent report predicted that S&P 500 earnings as a whole will drop by 2.7% this quarter. And my colleague Alex Dumortier has been warning about an impending "earnings recession" for more than three months now. Back in July, Alex observed that then-outstanding bottom-line performances had encouraged analysts to raise estimates of corporate earnings and thereby "sown the seeds of earnings disappointments -- and stock declines -- over the next few quarters."

The results released yesterday by Alcoa (NYSE: AA  ) , the first Dow component to report, seemed to confirm this fear for some. While the aluminum giant's adjusted operating income beat analysts' estimates, its press release contained a handful of disturbing predictions. The worst is that aluminum demand for the remainder of the year is likely to be less robust than the company expected. On the heels of this news, shares in the economic bellwether are down 4%. To read a full analysis of Alcoa's results, click here.

Adding fuel to bears' fire were warnings from Chevron (NYSE: CVX  ) and Cummins (NYSE: CMI  ) about their own upcoming earnings releases. Chevron released a statement (link opens PDF file) today saying that "earnings for the third quarter 2012 are expected to be substantially lower than second quarter 2012." And Cummins admitted that it had "lowered its full year revenue outlook for 2012 to approximately $17 billion compared to the Company's previous guidance of $18 billion."

These moves mirror similar ones by companies as disparate as Intel (Nasdaq: INTC  ) and Fedex, both of which have recently dampened forward earnings guidance.

Foolish bottom line
This earnings season could very well amount to one of the worst in the last couple years. If that's true, stocks will be bound to fall. To hedge against this possibility, download our free report about three American companies that are so dominant and globally diversified that even large-scale regional downturns hardly impact their bottom lines. To access this free report instantly, simply click here now.

John Maxfield has no positions in the stocks mentioned above. The Motley Fool owns shares of Cummins and Intel. Motley Fool newsletter services recommend Chevron, Cummins, and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 10, 2012, at 3:12 PM, Vassilopoulos wrote:

    Just in case you were born this morning...."cratering", as it applies to the stock market, is more like a 3 or 4% decline in one day.

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