Earnings Season: How the Dow's Financials Fared This Week

Earnings reports from stocks in the Dow Jones Industrials (DJINDICES: ^DJI  ) came fast and furious this week, with nine of the Dow 30 giving fresh outlooks on their respective businesses. The financial sector was particularly on exhibit, with Goldman Sachs (NYSE: GS  ) and American Express (NYSE: AXP  ) both representing the banking and credit space. General Electric (NYSE: GE  )  also maintains a substantial presence in finance. Let's look at their latest reports to see how these companies fared and how their futures look.

American Express' results disappointed investors, even though the card company managed to boost quarterly earnings by 12% from the previous year on 4% higher revenue, with cardholders spending about 6% more than they did this time last year. Shareholders seemed to focus on CEO Ken Chenault's comments about the caution that consumers are exercising with their credit, as increases in outstanding card balances have been relatively modest. Ordinarily, by this point in an economic recovery spending levels would have ramped up more substantially, and investors appears to be growing impatient with the sluggish pace of growth and the resulting headwinds on American Express' business. Given that AmEx revenue relies on transaction activity from both from merchants and from cardholders, any sign of faster spending growth in the future would bode well for the stock and for the Dow Jones Industrials generally.

Goldman Sachs provided a more upbeat surprise for investors, even though the outlook at the investment bank remains uncertain. Earnings fell 11% on an 8% decline in revenue from the year-ago quarter, but those drops were actually less extreme than investors had feared. Rising net interest income and gains in its investment-banking division helped offset falling revenue from market-making, and Goldman Sachs took extreme measures to cut expenses by 6% in order to bolster its bottom line. In particular, cutting $300 million in compensation and benefits shows how lean Wall Street has become, but the question going forward is whether Goldman Sachs can hold the line on compensation without losing top talent to competitors that are less stingy with their pay policies. Looking forward, the ongoing bull market in the Dow Jones Industrials and elsewhere in the market has spurred greater IPO activity, and mergers and acquisitions could give Goldman Sachs some growth opportunities as well.

Source: General Electric.

Finally, General Electric posted solid gains after its earnings report. The conglomerate has continued its strategy of deemphasizing the GE Capital unit, which saw a revenue drop of 8%. But net income for the segment was little changed, and with the coming spinoff of the Synchrony Financial retail-finance business, General Electric hopes that the efforts that it has made to diversify its exposure and refocus on its core industrial businesses will leave its finance arm in a position to contribute to the company's overall success without presenting dangerous structural problems.

Investors have hoped that financial stocks would lead a new leg higher in the bull market, but this week's results weren't so positive that they make further advances a sure thing. With market volatility increasing, what happens with financials in the months to come could determine whether the bull market in the Dow Jones Industrials continues for a sixth year.

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