Equity markets were off to go a good start in August as major American indexes posted gains of more than 2% on the day. This sharp spike came after a better than expected July reading for Supply Management’s manufacturing index and an unexpected climb in June construction spending. These solid reports combined with strong earnings in many European banks to fuel a robust rally on Wall Street and temporarily calm growing fears over the health of developed market economies.
However, later today markets will soak up another batch of earnings reports with a few key American bellwethers giving their quarterly updates which could erase or add to yesterday’s broad gains. Among the most important companies include Pfizer, Procter & Gamble, and MasterCard, representing a full swath of the U.S. consumer economy which has been especially hard hit in the recent recession. In addition, one more industrial focused company looks to be heavily watched today; the Dow Chemical company (NYSE:DOW) which also reports earnings after this trading session.
The company looks to be under the microscope after last week’s bullish report from chief rival DuPont which posted solid earnings and raised its 2010 forecast due to red-hot demand out of the Asia-Pacific region. DuPont reported sales gains of 47% in Asia and second-quarter profit excluding some items was $1.17 a share, topping the 94-cent average estimate of 10 analysts surveyed by Bloomberg. These numbers look to be hard to live up to for Dow since the bulk of DuPont’s gains came on the back of expanding operations in the electronics and auto refinish sectors as well a nice boost from the pharma sectors.
While Dow may trail its counterpart in variety it more than makes up for this with its deep focus on the industrial chemical and plastic sectors which make up more than 50% of the company’s sales. Analysts, on average, expect the company to report earnings of 56 cents per share on revenue of $13.69 billion. In the year ago quarter, the company posted earnings of 5 cents per share on revenue of $11.32 billion. If the company meets these expectations it will result in a robust profit increase from last year and will likely be due to greater demand for industrial products in emerging market and stabilizing commodity prices which have allowed the chemical company to better plan for its cost inputs and set prices accordingly.
For this reason we have decided to select the iShares Dow Jones U.S. Basic Materials Index Fund (NYSEARCA:IYM) as today’s ETF to watch. IYM tracks the Dow Jones U.S. Basic Materials Index which measures the performance of the basic materials sector of the U.S. equity market and allocates its top holding to the in-focus Dow Chemical Corporation which makes up 8.4% of the fund’s total assets. This is closely trailed by copper and gold giant Freeport McMoRan and DuPont which makes up the third biggest holding with 7.4% of IYM’s total assets. The fund has a heavy focus on large and medium cap securities which combine to make up more than 90% of the fund’s total assets, with the smaller firms likely to be heavily impacted by Dow’s results and outlook for the rest of the year.The fund has performed very well in recent weeks; posting a gain of 16.9% over the past month and a 25.7% return over the past 52 weeks. However, Dow’s earnings report later today will put this upward trend to the test and will likely set the tone in the sector for the foreseeable future.
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Disclosure: No positions at time of writing.
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