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Will Dow ETFs Continue to Surge as Q4 Earnings Unfold?

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The Dow Jones has been hitting record highs, with the benchmark hitting a new milestone of 29,000, thanks to signing of the phase one of the trade deal as well as the Fed’s accommodative policy. Lower rates are propelling activities in the economy, thereby leading to higher consumer spending (read: Dow Hits 29,000 Again: 5 Stocks Driving the ETF).

However, the earnings picture looks weak for Q4, like the first three quarters of 2019, thanks to tough comparisons and moderating economic growth. This could weigh on Dow Jones’ performance in the coming weeks. As such, its proxy version, SPDR Dow Jones Industrial Average ETF (DIA - Free Report) , which tracks this benchmark, is under the spotlight.

DIA in Focus

This is one of the largest and most-popular ETFs in the large-cap space with AUM of $23.1 billion and average daily volume of 2.7 million shares. Holding 30 blue chip stocks, the fund is widely spread across components with each holding less than 7.8% share. Information technology (21.4%), industrials (19%), financials (15.2%), healthcare (13.2%) and consumer discretionary (12.5%) and are the top five sectors. DIA charges 17 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk.   

Let’s delve deeper into the fourth-quarter earnings picture that will likely aid the fund in the coming days.

Q4 Earnings Trends

S&P 500 earnings are expected to decline 3.2% year over year despite 3.5% higher revenues. This would follow 1.7% deceleration in the third quarter, 0.6% growth in the second quarter and a flat show in the first quarter. Earnings growth is expected to be negative for 10 of the 16 Zacks sectors. Autos and energy are expected to be the biggest drags with expected earnings decline of 57% and 45.4%, respectively (read: Bet on Favorite Sector ETFs & Stocks This Earnings Season).

So far, three blue chip firms in the index have already reported their earnings. JPMorgan Chase (JPM - Free Report) beat on the earnings and revenue front while Goldman (GS - Free Report) disappointed investors’ by missing on earnings. The largest U.S. health insurer UnitedHealth Group (UNH - Free Report) reported mixed results wherein it breezed past the Zacks Consensus Estimate on earnings but lagged on revenues.

More than 10% of the companies are expected to announce results in the coming weeks. Johnson & Johnson (JNJ - Free Report) and American Express (AXP - Free Report) are expected to release earnings on Jan 22 and Jan 24, respectively. International Business Machines (IBM - Free Report) is scheduled to report on Jan 28 while Microsoft (MSFT - Free Report) is slated to release quarterly results on Jan 29.

Earnings Whispers

According to our methodology, the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Johnson & Johnson has a Zacks Rank #2 and an Earnings ESP of +0.77%, indicating higher probability of beating estimates this quarter. The stock delivered average trailing four-quarter positive surprise of 4.27% and witnessed positive earnings estimate revision of a penny over the past seven days for the to-be-reported quarter. Analysts raising estimates right before earnings — with the most up-to-date information possible — is a pretty good indicator for the stock. The stock has a favorable VGM Score of B.

American Express has a Zacks Rank #2 and an Earnings ESP of +0.41%. The company came up with average positive surprise of 2.73% in the trailing four quarters and witnessed no earnings estimate revision over the past month for the to-be-reported quarter. The stock has a VGM Score of C (read: 10 ETFs That Have Been Investors' Favorites).

International Business Machines has a Zacks Rank #3 and an Earnings ESP of -0.11%. The stock came up with a beat in each of the last four quarters, the average being 2.04%. It has seen negative earnings estimate revision of a penny in the past 30 days for the to-be-reported quarter. The stock has a VGM Score of B.

Microsoft has a Zacks Rank #3 and an Earnings ESP of -0.70%. The stock saw no earnings estimate revision over the past 30 days for the soon-to-be-reported quarter. The company delivered average positive surprise of 9.64% over the last four quarters. It has a VGM Score of C.

Bottom Line

With most blue-chip companies’ earnings scheduled over the coming weeks and sentiments being mixed, investors should closely monitor the movement of the Dow ETF and grab an opportunity that arises from a surge in any of the 30 stocks.

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