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Dow Lower on Global Fears as Earnings Season Arrives

By John Maxfield – Oct 9, 2012 at 12:03PM

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Why the Dow is down.

The quarterly ritual of earnings season officially kicks off today with the release of Alcoa's (AA) earnings after the market close. If the response of traders is any indication, they're not expecting much. The Dow Jones Industrial Average (^DJI), the leading indicator of blue chip stocks, is currently down by 90 points, or 0.69%.

Earlier today, the International Monetary Fund released its quarterly World Economic Outlook report. The document paints a bleak picture of the global economy, noting that "Risks for a serious global slowdown are alarmingly high." Worldwide output is expected to expand just 3.3% this year and 3.6% in 2013 -- under the IMF's definition of a recession, global output needn't actually contract to trigger the classification. These figures are 0.2 and 0.3 percentage points, respectively, less than previous forecasts.

Of greater interest to traders, however, is speculation over the state of corporate earnings. A FactSet Research report cited by my colleague Dan Caplinger recently predicted that profits for the S&P 500 as a whole will drop 2.7% this quarter. As similarly noted by Dan, "a look at the Dow Jones Industrials shows that fully half of the Dow's 30 companies are seen posting lower earnings for the [third] quarter than they did in the corresponding quarter [in 2011]." Another colleague of mine, Alex Dumortier, has even warned of an impending "earnings recession."

While the proof will ultimately be in the pudding, there's concrete evidence to believe Dan and Alex are on to something. In the last month, companies as disparate as Intel (INTC -6.41%), FedEx (FDX 0.22%), and Caterpillar (CAT 0.92%) have all downgraded forward earnings guidance in response to economic uncertainty and decreased demand for their products and/or services. With earnings season kicking off today, we'll now know whether or not these warnings will have come to fruition.

Foolish bottom line
Given the fears about the global economy and earnings season, investors would be wise to only consider the most solid and stable companies in the market today. Should Caterpillar make your list? To read our analysts' research on the risks and opportunities the company faces, check our our premium research report on Caterpillar. You'll also recieve a year of free updates on the company. Click here for your copy.

Foolish contributor John Maxfield does not have a financial stake in any of the companies mentioned above. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of FedEx and Intel. Motley Fool newsletter services have recommended writing puts on Intel. The Motley Fool has a disclosure policyWe Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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