The Dow Jones Industrial Average (DIA) continues to march higher, and it’s currently just a percent away from an all-time high. Corporate earnings for the third quarter have been mixed so far, which weighed on the index. Dow Jones Futures indicated a marginally weak opening for today. The Dow is up more than 16% so far this year while the S&P 500 (SPY) has gained 21%. The S&P 500 hit a new all-time high yesterday. Whether the Dow Jones follows remains to be seen.
Apple earnings to drive the Dow Jones
The tech giant Apple (APPL) will report its quarterly earnings on October 31. Apple stock, one of the top constituents of the Dow Jones Index, has been strong ahead of the results. The stock has gained in seven of the last eight trading sessions. It has gained more than 56% year-to-date and is trading close to an all-time high. Wall Street analysts are expecting earnings of $2.84 per share, a decline of more than 2% from a year-ago period.
Apple has beaten analysts’ EPS estimates for the last 13 consecutive quarters. A better-than-expected show from Apple will likely boost its stock even higher. To learn more, see Cowen: Apple Sales Might Reach $90 Billion in Q1
Apart from its earnings miss or beat, the management commentary for the next year amid China trade war would be vital. Apple is the second-biggest component of the Dow Jones Index, and its earnings will pave the way for the markets this week.
As we discussed earlier, the S&P 500 hit a new record high yesterday, driven by tech and telecom stocks. The telecom and media giant AT&T (T) stock gained 4.3% after beating analysts’ Q3 expectations on October 28.
Other heavyweights in the Dow Jones Index
The fast-food chain McDonald’s (MCD) stock plunged on weaker-than-expected numbers last week, which weighed on the Dow Jones Index. There was a flurry of brokerages cutting McDonald’s price targets after its quarterly release last week. Credit Suisse, Morgan Stanley, UBS, and many other brokerages cut its target price. Interestingly, its steep selling could be an opportunity for buyers.
Shares of Boeing (BA), the top constituent of the Dow Jones Index, marginally recovered this week after weak third-quarter earnings triggered a big selloff. While many top US companies are trading close to their respective highs, Boeing stock is trading 25% below its all-time high of $446. Apple, Boeing, and McDonald’s collectively form approximately 20% in the Dow Jones Index.
Trade talks on the right footing?
China and the US continued to make some progress on the trade talks, which might provide the nudge to the markets. CNBC reported on October 28 that the US is considering extending tariff exclusions on Chinese imports, citing the Office of US Trade Representatives.
The exemption on nearly 1,000 goods worth $34 billion is set to expire on December 28. The trade talks progress, though they seem slow at the moment, would provide a significant boost to the Dow Jones Index. The two parties nearing Phase 1 of the trade deal would likely continue optimism among investors.
Will the Fed rain on the parade?
The Fed will also play a major role in driving the markets this week. Although it’s widely expected that it will deliver a 25-basis point interest rate cut, the committee’s tone will be at the core of the issues. A hawkish stance from the Fed for the future might disappoint investors in the short term. The federal funds rate currently is in the range of 1.75% to 2%. The Fed has trimmed the benchmark rate twice this year.
President Trump has faced strong criticism from the Fed and Chair Jerome Powell for the last few months. He even demanded the Fed reduce interest rates to zero or even lower. How Trump’s pressure tactics play out on the Fed’s policy review meeting this week remains to be seen.
Dow Jones valuation
The Dow Jones Index is currently trading close to 20 times its trailing 12 months earnings, higher than its historical average. However, more than 50% of the companies from the 30-stock index have a trailing PE lesser than the broader markets. Thus, valuation doesn’t seem to be a big concern for the index as of now. In comparison, the S&P 500 Index is trading beyond 22 times its trailing 12-month earnings.
The Dow Jones Index is currently trading 1.6% and 3% above its 50-day and 200-day simple moving average levels, respectively. The premium to both the key support levels indicates strength in the index. Its 50-day level close to $26,651 will likely act as a support in the short term. Its 14-day RSI (relative strength index) came in at 66, on its way to the overbought zone. An RSI above 70 indicates the stock or index in an overbought zone while RSI below 30 indicates it in the oversold zone. With a recent surge, the S&P 500 Index is now trading in the overbought zone with its RSI at 73.