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Will Q3 Earnings Drive Dow ETF Higher?

Sweta Killa

Trade drama is playing foul on the U.S. stock market and the earnings picture. After gaining nearly 1% in the third quarter, the stocks faltered with the start of the new quarter. Like the first half, the earnings picture looks soft again this time, thanks to tough comparisons, moderating economic growth and continuing trade dispute.

However, the Fed’s easing policy is driving the stock market higher. The central bank has slashed interest rates twice this year –by 25 bps each – and there is speculation about more rate cuts (read: Chances of Fed Rate Cut in October Rise: Sector ETFs to Buy). 

As such, its proxy version, SPDR Dow Jones Industrial Average ETF DIA 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 $20.9 billion and average daily volume of 3.2 million shares. Holding 30 blue chip stocks, the fund is widely spread across components with each holding less than 9.7% share. Industrials (20%), information technology (19.9%), financials (14.6%), consumer discretionary (13.7%) and healthcare (12.2%) 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 third-quarter earnings picture that will likely build up the movement for the fund in the coming days.

Q3 Earnings Trends

S&P 500 earnings are expected to decline 5.1% year over year despite 4.2% higher revenues. This would follow 0.4% growth in the second quarter and a flat show in the first quarter. Earnings growth is expected to be negative for 11 of the 16 Zacks sectors, with energy and basic materials being the biggest drags (read: 4 Sector ETFs & Stocks to Bet on Ahead of Q3 Earnings).

Nearly one-fourth of the blue chip firms are expected to announce results in the coming weeks. JPMorgan Chase JPM, Johnson & Johnson JNJ, International Business Machines IBM, UnitedHealth Group UNH and Goldman GS are expected to release earnings on Oct 15. American Express (AXP) is scheduled to report on Oct 18 while Microsoft MSFT is slated to release quarterly results on Oct 23.

Earnings Whispers

According to the proven Zacks methodology, the combination of a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) along with a positive Earnings ESP raises the chances of an earnings beat while Zacks Rank #4 or 5 (Sell-rated) stocks are best avoided. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

JPMorgan has a Zacks Rank #3 and Earnings ESP of +0.34%, indicating a reasonable chance of beating estimates this quarter. The company saw positive earnings estimate revisions of 3 cents over the past 30 days for the to-be-reported quarter and delivered average positive surprise of 3.07% in the last four quarters. The stock has an unimpressive VGM Score of D.

Johnson & Johnson has a Zacks Rank #3, which increases the predictive power of ESP. However, its Earnings ESP of 0.00% makes surprise prediction difficult for the stock. The stock delivered average trailing four-quarter positive surprise of 3.02% and witnessed no earnings estimate revision in the past month for the to-be-reported quarter. The stock has a favorable VGM Score of B.

International Business Machines has a Zacks Rank #2 and an Earnings ESP of -0.27%. The stock came up with a beat in the last four quarters, the average being 1.81%. It has seen negative earnings estimate revision of 7 cents in the past 30 days for the to-be-reported quarter. The stock has a VGM Score of B (read: 5 Amazing ETF Strategies for the Fourth Quarter).

UnitedHealth carries a Zacks Rank #3 and an Earnings ESP of -0.50%. The stock saw negative earnings estimate revision of a couple of cents for the quarter to be reported over the past 30 days. In the previous four quarters, it pulled off average positive surprise of 3.37%. The stock has a VGM Score of A.

Goldman is a Zacks #3 Ranked player and has an Earnings ESP of -2.47%. Its earnings surprise track over the preceding four quarters has been robust, the average being 20.73%. However, the company has witnessed negative earnings estimate revision of 50 cents over the past 30 days for the yet-to-be-reported quarter. The stock has a VGM Score of C.

American Express has a Zacks Rank #3 and an Earnings ESP of -1.98%. The company came up with average positive surprise of 0.94% in the trailing four quarters. However, the company has witnessed negative earnings estimate revision of a penny over the past month for the to-be-reported quarter. The stock has a VGM Score of C.

Microsoft has a Zacks Rank #2 and an Earnings ESP of -0.55%. The stock has seen positive earnings estimate revision of a penny over the past 30 days for the soon-to-be-reported quarter. The company delivered average positive surprise of 11.72% over the last four quarters. It has a VGM Score of B.

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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