Dow Falls Slightly as Earnings-Induced Sector Rotation Takes Hold

The latest earnings show some trends that Dow investors should consider.

Apr 17, 2014 at 12:30PM
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The Dow Jones Industrials (DJINDICES:^DJI) in early afternoon trading have continued the tug-of-war they've fought all day, with the average falling 20 points as of 12:30 p.m. EDT. A rash of earnings reports from both inside and outside the Dow 30 has left the broader stock market largely flat, but results from General Electric (NYSE:GE) and American Express (NYSE:AXP) suggest a change in sentiment away from the financial industry toward more industrial lines of business.

General Electric is the obvious place to look for clues on this sector-rotation trend, as the conglomerate represents a microcosm of the two industries within its own corporate structure. A huge emphasis on finance a decade ago gave GE huge exposure going into the financial crisis; ever since then, General Electric has worked to reduce its potential losses if another crisis were to occur in the future. Its shares jumped 2.3% by early afternoon, and even though General Electric suffered modest year-over-year declines in sales and net income in its latest quarter, the company's aviation and oil and gas segments were instrumental in pushing overall industrial profits up by double-digit percentages. As GE plans its spinoff of consumer-finance unit Synchrony Financial, it's clear the company is positioning itself to take advantage of its industrial legacy.

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By contrast, American Express fell more than 2%. The card giant's earnings report seemed strong enough, with first-quarter profit rising 12% on a 4% rise in overall revenue. Yet even with American Express' indisputable edge in attracting a high-end clientele that is most likely to sustain spending levels even in tough economic conditions, shareholders appear uncertain about whether the company will find new growth opportunities going forward. With competition rising in the mobile-payments industry, American Express will have to work hard just to keep its grip on the portion of the card market it has.

More broadly, opportunities in the industrial sector seem more favorable than those in financials. The regulatory environment in the financial industry is likely only to get tighter in the years to come, and that could put a ceiling over potential growth for banks like American Express, as well as other financial providers. By contrast, low energy prices could help drive a new industrial revolution in the U.S., and that in turn could help long-struggling industrial stocks that haven't benefited from the economic recovery as much as companies in other sectors.

By themselves, single earnings reports don't prove or disprove a broader trend. But as potential signs, they're useful to watch to see if a trend will eventually form -- and reward those investors who saw it first.

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Dan Caplinger owns shares of General Electric Company. The Motley Fool recommends American Express. The Motley Fool owns shares of General Electric Company. 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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