28 Oct

Dow Jones Index: Watch the Earnings, Fed, and PMI

WRITTEN BY Vineet Kulkarni

Today starts another big week for Wall Street. Notably, broader markets are teasing all-time highs. The tech companies reporting this week will largely drive the markets. The Fed will be meeting for its policy review tomorrow. Later in the week, the Consumer Sentiment Index and US manufacturing PMI will guide the markets. The Dow Jones Index (DIA) is just 1.6%, while the S&P 500 (SPY) is around 5 points away from its respective all-time highs.

Earnings will lead the Dow Jones Index

Alphabet (GOOGL), Google’s parent company, will release its quarterly earnings today after the markets close. Currently, the company is trading at its all-time high and has gained more than 22% YTD. Recently, Google faced regulatory scrutiny, which investors should watch. Analysts expect the company to report an EPS of $12.42, which is almost 5% lower YoY. The company beat analysts’ estimates, which could open up more upside for the stock. BMO raised its target price from $1,225 to $1,245 on October 25.

Amazon (AMZN) reported its earnings last week. The company missed analysts’ EPS estimates. Amazon’s gloomy guidance for the holiday season hurt investors more. In the fourth quarter, the company expects sales between $80 billion and $86.5 billion, which was below analysts’ forecast of $87.37 billion.

AT&T (T) will report its earnings today. The stock was weak before the company’s third-quarter earnings. AT&T forms more than 1% in the S&P 500. Analysts expect the company’s EPS to grow around 4% YoY in the third quarter. We’ll have to watch management’s outlook amid increased pressure from activist investors. So far, AT&T stock has risen about 30% this year.

Facebook (FB) and Apple (APPL) will report their earnings on Wednesday. Apple is one of the top constituents of the Dow Jones Index. Recently, the company has seen a notable uptrend. To learn more, read Why Apple’s Q4 Earnings Will Be Unique.

Mixed earnings so far

According to a report released by FactSet on October 25, among the 200 companies from the S&P 500 that reported their third-quarter earnings so far, 80% reported a positive EPS surprise—above its five-year average. Among the 200 companies, 64% reported a positive revenue surprise in the third quarter.

Instead of a profit miss or beat, it’s important to see how companies look at the future. Many economic indicators point to a gloomy picture ahead. Management’s downbeat commentary suggests lower investments and weaker earnings growth for the next year. To learn more, read Dow Jones Could Be in Trouble, Recession Fears Rise.

For the fourth quarter, 26 S&P 500 companies have issued a negative EPS guidance, while 12 companies released a positive EPS guidance, according to FactSet.

Fed and the Dow Jones Index

Apart from earnings, the Fed’s policy will also drive the markets this week. Traders expect more than a 93% probability of a quarter-point rate cut, according to the CME’s FedWatch tool. So far, the Fed has delivered two 25-basis point rate cuts this year. The expected cut would bring the federal funds rate range to 1.50%–1.75%.

Along with the Fed’s policy, we’ll have to see whether the central bank hints at more cuts or chooses to pause the cuts. A probable cut could push the Dow Jones Index and the S&P 500 towards new highs. However, if the Fed chooses a different path and doesn’t deliver the widely expected rate hike, the indexes might see some pullback. The Dow Jones Index has fallen marginally since the last rate cut in September.

This week’s PMI reading 

Notable economic indicators like the manufacturing PMI and Consumer Sentiment Index will be out later in the week. The ISM manufacturing PMI will be important to watch this week. Notably, the ISM manufacturing PMI contracted for the last two consecutive months. The Dow Jones and S&P 500 fell due to last month’s PMI data.

So far this year, the Dow Jones Industrial Average Index has risen almost 16%, while the S&P 500 has risen more than 20%. Along with quarterly earnings and economic indicators, China’s trade war developments will likely weigh on Wall Street too. The US and China seemed to be nearing the “Phase 1″ of the trade deal. However, trade talk uncertainties could drive the market volatility until there’s a complete resolution.

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