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Anticlimactic Earnings Spell Trouble for the Dow

By Dan Caplinger - Apr 9, 2013 at 11:05AM

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Alcoa's opening salvo hasn't created confidence in the markets.

After weeks of looking forward to first-quarter earnings results, investors didn't get the decisive start to earnings season that many had expected when Alcoa (AA) reported results last night. So far this morning, the Dow Jones Industrial Average (^DJI 0.60%) has flipped between gains and losses, and as of 10:55 a.m. EDT the average is down about three points, with broader market benchmarks showing similarly muted responses.

You may have expected to see much stronger gains for the Dow this morning. Alcoaled off the parade of Dow earnings reports that will be released over the days and weeks to come, and its results were fairly strong, with its earnings of $0.11 per share coming in well above expectations. But Alcoa's drop in revenue once again emphasized the importance of cost-cutting and efficiency gains in managing earnings, and until actual demand starts to improve, it's hard for investors to feel particularly optimistic about the economy's prospects. Alcoa's shares are down 0.8% early in the day.

Yet some key stocks in the Dow have managed to take a more enthusiastic view. Caterpillar (CAT 1.78%) has risen 0.7%, which comes as something of a shock, given the extent to which the construction equipment manufacturer shares Alcoa's sensitivity to the global economy. Yet even as the company adds to recent layoffs due to mining-industry weakness, Caterpillar's shares already reflect much of the pessimism that corporate executives and outside analysts have cited for months now. Until growth recovers in key markets like China, Caterpillar will have a tough time recovering, although its beaten-down share price may protect it from further losses, absent unexpected bad news on the macroeconomic front.

As important as earnings will be, other news will also be a key driver for certain stocks. J.C. Penney (JCPN.Q), for instance, has plunged 12% after finally giving up on CEO Ron Johnson, replacing him with former CEO and board chairman Mike Ullman. As much as Johnson's tenure has been plagued with uncertainty and a lack of success, investors aren't excited about the prospect of hiring back his predecessor. J.C. Penney's failure to find a more creative solution to its management woes is a discouraging sign of how big a challenge it faces in adapting to changing conditions in the retail industry.

Earnings will be the key
Investors have placed a lot of importance on seeing favorable earnings results this quarter. If the actual reports from Dow component companies turn out to be anticlimactic, then the resulting disappointment could put another nail in the coffin of the aging bull market for stocks.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$32,120.28 (0.60%) $191.66
Caterpillar Inc. Stock Quote
Caterpillar Inc.
$209.31 (1.78%) $3.66
Alcoa Inc. Stock Quote
Alcoa Inc.
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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