Is the Dow Nearing an Earnings Cliff?


The Dow Jones Industrial Average (INDEX: ^DJI) and the S&P 500 (INDEX: ^GSPC) declined 0.62% and 0.95%, respectively, today. For the broader S&P 500 index, this marked the fourth consecutive decline, consistent with a torrent of macro news flow that has been anything but reassuring.

On that front, today did not disappoint, as S&P lowered Spain's credit rating two notches to BBB-minus -- one notch above junk. Further, the credit rating agency has a "negative outlook reflecting the credit ratings agency's view that there are significant risks to economic growth and budgetary performance, plus a lack of a clear direction in euro zone policies." Investors are already aware that Spain isn't a good credit risk largely because of the liability associated with its banking system and the evidence suggests that austerity will not kick-start the economy (fancy that!). But the most worrying aspect and the greatest source of uncertainty is the manner in which policymakers are(n't) dealing with the problem: How is it that Spain has yet to formally request financial assistance from its eurozone partners?

In stock-specific developments, Chevron (NYS: CVX) contributed substantially to the Dow's drop with a 4.18% share price decline. The oil major, which will report third-quarter earnings on Nov. 10, issued an interim update saying that earnings would come in "substantially lower" than those for the second quarter, citing, among other factors, lower realized margins in its downstream business. This comes on the back of lower guidance from aluminum producerAlcoa (NYS: AA) and diesel and natural gas engine manufacturer Cummins (NYS: CMI) . This series of three is not a positive indicator for industrial activity, but I think they are representative of a trend: I expect profit warnings to begin to multiply as we move through this earnings season. In that environment, stock-pickers will be well-served by looking at stocks riding a secular growth cycle. One example: "The Only Growth You Need to Profit From the NEW Technology Revolution." Click here to claim your free report and find out which stock I'm referring to.

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Alex Dumortier, CFA, has no positions in the stocks mentioned above; you can follow him on Twitter, @longrunreturns. The Motley Fool owns shares of Cummins. Motley Fool newsletter services recommend Chevron and Cummins. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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