Bad Earnings Slam Dow, Cast Doubts on Soft Landing

The Dow slipped this morning, dropping 0.4% (or approximately 160 points), falling below the 38,000 level that it surpassed for the first time yesterday. The decline was influenced by a significant 10% drop in 3M’s stock, following the release of its disappointing guidance. Similarly, Johnson & Johnson experienced a fall of over 1% after revealing their earnings report.

While the Dow showed a downturn, the S&P 500 and the Nasdaq Composite remained relatively stable, trading mostly flat through noon.

In the housing sector, D.R. Horton saw a sharp decline of over 8%, as its earnings per share missed the consensus estimates set by Wall Street. General Electric also witnessed a 1% drop, attributed to its weaker-than-expected guidance.

Conversely, United Airlines experienced a surge of over 6% following robust fourth-quarter results. The airline, however, forecasted a potential loss in the first quarter due to the grounding of Boeing 737 Max 9 airplanes, which were recently involved in the Alaska Airlines emergency. Other airlines, including American Airlines, Southwest Airlines, and Alaska Air Group, saw their shares increase by at least 3%, with Delta Air Lines gaining over 2%.

In the telecommunications and consumer goods sectors, Verizon and Procter & Gamble served as counterweights to the overall Dow losses, rising more than 4% and 5% respectively, buoyed by positive investor reactions to their financial reports.

The recent market rally has been driven primarily by tech stocks, with Nvidia standing out after enjoying an eye-popping 20% gain this month. But the tech-heavy rally left small caps out to dry as the Russell 2000 dropped 2.5% this month.

As the week progresses, traders are poised for the release of significant economic data, including the preliminary fourth-quarter gross domestic product figure on Thursday, followed by the Commerce Department’s personal consumption expenditures price index for December on Friday.

Today’s manufacturing surveys from the Philadelphia and Richmond Federal Reserve Banks added to the market’s skepticism as both surveys continued the recent trend of disappointing ‘soft’ data. The Richmond Fed survey, in particular, displayed a significant drop in manufacturing activity to its lowest point since the COVID lockdowns. This downturn was accompanied by worsening indicators in new orders and employment (stagnating economy) while wages saw an increase (inflation).

Furthermore, the Philly Fed Services survey fell back into contraction territory in January, with a notable rise in the part-time employment index.

The pattern of ‘soft’ survey data, compared to relatively stronger ‘hard’ economic data, raises questions about whether the market’s economic optimism is warranted. The inconsistency in how survey data is interpreted – celebrated when positive but largely ignored when negative – also points to a potential contrarian indicator with stocks at their all-time highs.

Today’s poor earnings reports could start to shift sentiment, and, with hedge funds piling on shorts last week, we may be looking at the start of a real post-November/December/January rally selloff.


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