- There has been nothing truly great and powerful about the overall earnings performance of the Dow Jones Industrial Average.
- Reported earnings for the Dow Jones Industrial Average have declined in three of the past four quarters.
- The first quarter was the seventh straight quarter that revenue growth for the Dow Jones Industrial Average has failed to exceed 1.0%.
- The Dow Jones Industrial Average has seen its share of earnings reporting highlights and lowlights.
My six-year old daughter recently starred in an off Broadway production of The Wizard of Oz (way off Broadway if you catch my drift). She played the part of the Scarecrow, who of course was looking for a brain he always had. Her performance drew some rave reviews, much like the Dow Jones Industrial Average has on its scene-stealing march to a new record high.
That jaunt to a new high has been a welcome sight for Dow Theorists who maintain the Dow Jones Industrial Average and Dow Jones Transportation Average should move in tandem to confirm a trend. Having done so, a fair share of oohs and aahs have been expressed over the Dow's breakout performance.
With the breakout to new highs, the price-weighted Dow Jones Industrial Average is still trailing the market-cap weighted S&P 500 on a year-to-date basis. Tsk-tsk. The salient point is that both blue-chip averages are still outperforming the Nasdaq Composite and Russell 2000, which are home to stocks generally viewed as having stronger earnings growth prospects.
By now everyone is aware that a whole bunch of growth stocks have had a tough time of it lately, burdened by an inability to meet high expectations that has made it difficult to justify even loftier valuations. Their difficulties in the face of added concerns about geopolitical risk and the pace of global economic activity has afforded blue-chip stocks - and Dow Jones Industrial Average stocks in particular - an attractive measure of relative strength.
Interestingly, though, at the same time the Dow has hit new record highs, first quarter reported earnings for the Dow Jones Industrial Average have declined 3.5% year-over-year on a 0.2% decline in revenue, according to FactSet. At the end of 2013, the consensus estimates called for normalized EPS to decline 1.1% and revenues to be up 3.3%.
The lackluster earnings performance can't be attributed to just one company either, like IBM (NYSE:IBM) which reported a 15.3% year-over-year decline in normalized EPS on a 3.9% decline in revenue.
Altogether there were 13 Dow components that reported a year-over-year decline in normalized EPS for the first quarter and 13 components that saw revenues decline year-over-year.
There were eight components that registered a decline in both normalized EPS and revenues. To be fair, twelve components posted year-over-year increases for normalized EPS and revenues (we're giving Home Depot, which reports on May 20, the benefit of the doubt there).
Price Since April 10
Johnson & Johnson
Procter & Gamble
Source: FactSet; Capital IQ; Company Reports
The first quarter is on track to be the third time in the past four quarters, and the fifth time over the past ten quarters, that reported earnings for the Dow Jones Industrial Average have declined on a year-over-year basis. Moreover, the first quarter was the seventh straight quarter that revenue growth hasn't exceeded 1.0%.
Reported EPS Growth
Reported Revenue Growth
With an earnings reporting track record like that juxtaposed with the Dow hitting all-time highs, it's enough to make one wonder if earnings even matter. They do, as momentum investors have learned this year, only there are some periods when they seem to matter less.
This is one of those periods for the Dow Jones Industrial Average. The travails of the momentum stocks, and the breakdown of the Russell 2000, have spurred a rotation into the Dow components.
It's a rotation Scarecrow could appreciate.
When the going gets tough for growth stocks, it seems that investors mindlessly shift into Dow stocks in a capital preservation effort. It isn't a mindless shift though. Rather, it is full of mindfulness that Dow Jones Industrial Average companies have a time-tested operating history, balance sheet strength, less earnings volatility that stems from an industry-leading position, relatively low P/E multiples, and free cash flow that can be used for dividend payments and share repurchases.
All of that doesn't mean Dow stocks won't go down, yet all of that feeds a presumption that Dow stocks will be steadier in a volatile market and/or go down less in the event of a larger correction.
What It All Means
Since JPMorgan Chase (NYSE:JPM) reported its first quarter results before the open on April 11, the Dow Jones Industrial Average has risen 1.7%. Over the same period, the S&P 500 has increased 2.1%, the Nasdaq Composite has increased 0.4%, and the Russell 2000 has declined 2.8%.
The Dow's gains have been forged on the back of gains in 24 of its 30 components. Eleven of those gainers fall into the camp of companies that saw year-over-year increases in normalized EPS and revenues in the first quarter while six of those gainers registered declines for both.
Hence, there has been some good, some bad, and some in between on the earnings reporting front for the Dow Jones Industrial Average. Nonetheless, it has become apparent again in the early part of this year that, when the market gets tough, investors often feel as if there's no place like the Dow Jones Industrial Average for finding a home in blue-chip stocks.
That search for refuge will benefit some investors more than others because earnings do matter.
High valuations, geopolitical worries, or economic concerns might create an increased aversion to owning momentum stocks, but keep in mind that not all Dow stocks will lead you magically down the yellow brick road when their own valuations get stretched in a rush to low-beta safety.
In that vein, a peak behind the earnings curtain for the Dow components reveals something closer to oohs and Oz than just a whole lot of oohs and aahs that have accompanied the Dow's breakout to new highs.
That is, there were some individual reporting standouts, yet there wasn't anything truly great and powerful about the overall earnings performance of the Dow Jones Industrial Average. There hasn't been for some time and it only takes half a brain to see that.