How Earnings Season Could Save the Dow From Falling

As investors deal with risk in the market again, favorable views for the coming earnings season could prevent a big drop.

Jul 10, 2014 at 12:00PM
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The Dow Jones Industrials (DJINDICES:^DJI) reminded investors this morning that the stock market can go down as well as up, with the average falling 1% early and remaining down by 0.6% as of noon EDT. Most market commentators blamed the decline on trouble in Europe, with lawmakers in Portugal raising concerns over the health of the country's largest bank and reawakening fears from the continent's 2010 sovereign debt crisis. Yet even as many investors seem to expect a long-awaited correction in the Dow, others look forward to the coming earnings season to provide more evidence of fundamental support for the long-term prospects of the index's member companies.

The mood coming into earnings season
From a broad-based perspective, the recent mood among investors about earnings for Dow Jones Industrials components has been fairly positive. Predictions for full-year 2014 operating earnings have remained largely unchanged, and we've actually seen a net jump over the past four weeks in expected 2015 operating earnings for the overall Dow.

Intc

Source: Intel.

Intel (NASDAQ:INTC) has led the charge, with investors expecting 6% to 7% higher operating earnings than they did a month ago. Interestingly, Intel's brighter prospects have come from an unexpected source: its PC business, which many investors had written off for dead years ago. The long-term downward trend for PC sales has been in place for quite a while, as more customers moved toward smartphones, tablets, and other mobile-device options rather than relying on traditional desktop computers. While the transition away from the popular Windows XP operating system has prompted a recent short-term bump in PC sales, Intel believes the rise in interest in PCs could last a lot longer, and that has helped send its shares to levels not seen in more than a decade.

Dd

Source: DuPont.

Of course, not all of the news on the earnings front has been positive. Typically, you'd expect companies to provide negative warnings in the run-up to earnings season, and that's been the case with DuPont (NYSE:DD) this time around. The chemical giant surprised investors by cutting its full-year earnings outlook by roughly 5% to 7%, but the real shock was that the shortfall originated from DuPont's agricultural division, which has seen much better results in recent years than its traditional performance chemicals business. Some of DuPont's troubles appear isolated to the current growing season, with the company mistakenly expecting larger plantings of corn than actually occurred. Bad weather also deferred growing season and hurt sales of other ag products. Yet shareholders are nervous about potential long-term impacts as well, having cut 2015 earnings projections by about 3%.

Nevertheless, from a long-term perspective, the Dow Jones Industrials continue to see solid prospects for earnings growth. Investors expect about 9% higher operating earnings in 2015 than they project for 2014. If that growth rate holds, any decline in the Dow would make stocks look even more attractive, especially if earnings stay strong this quarter.

Earnings season starts in earnest next week for the index, and as the market goes through some choppy times, investors should keep their eyes on long-term fundamental trends among the companies whose shares they own. By staying focused on the big picture, you can better position yourself to make smart, well-informed portfolio decisions to maximize your returns in the long run.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of 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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