Earnings season isn't close to over, but we've already seen a huge number of stocks in the Dow Jones Industrials (DJINDICES:^DJI) report their first-quarter results. So far, we've seen more companies do better than expected than do worse, but given the extent to which analysts lowered the earnings bar in the run-up to the beginning of earnings season, investors aren't entirely confident about whether the overall performance of corporate America is strong enough to keep the bull market in stocks roaring for a sixth straight year. This week, Dow components Merck (NYSE:MRK), ExxonMobil (NYSE:XOM), and Chevron (NYSE:CVX) will add their results to the mix, and what they say about some of the most challenging sectors of the U.S. economy right now could help determine which direction the Dow moves in the weeks and months to come.
Investors expect Merck to report 7% lower earnings on a revenue decline of about 2%, a string of contracting financial results that's expected to persist throughout 2014. The culprit: the loss of patent protection on blockbuster drugs that has hurt results throughout the entire industry hit Merck particularly hard. The company has nevertheless created enthusiasm among investors with promising new treatment prospects in the hepatitis C and cancer spaces, giving shareholders hope that Merck's plunge off the patent cliff won't produce a fatal fall. Yet drug development takes time, and clinical successes won't have a positive impact on Merck revenue and net income for years to come.
As the two energy giants in the Dow, ExxonMobil and Chevron face the same challenges of finding new assets in an increasingly competitive world for the energy industry. Chevron will have the harder time, with sales seen falling 4% and earnings per share taking a 21% dive for the first quarter. Chevron has already warned that its raw production volume would fall both in the oil and natural gas segments, citing bad weather conditions in many of its key regions, and other issues like asset writedowns and adverse currency impacts could weigh on earnings even further.
Investors expect Exxon to produce a slight increase of less than 1% in revenue, helping to cushion the drop in earnings per share to around 11%. News that the company achieved a 103% reserve replacement rate in 2013 helped appease some concerns about Exxon's ability to sustain production volumes, and Exxon is clearly investing in major projects to discover new sources of future production. Yet the wildcard for Exxon in particular is the situation in Russia, with the potential for escalation in Russia's conflict with Ukraine raising worries about possible sanctions that could limit Exxon's ability to keep doing business in the Eurasian nation.
This week, Dow investors should keep their eyes on all three of these companies, with a particular eye toward seeing how each company expects to boost their future growth. All three of these Dow stocks have the potential to do great things if they can overcome the challenges they face.
Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.