The Dow Jones Industrial Average closed at its first record high of the year this past week, and though it cooled off a bit on Thursday and Friday, the index is still up 5 percent in the past three months. The odd thing is that this surge has come in the midst of an earnings season in which the 30 stocks that make up the Dow are actually showing a decrease in earnings year-over-year.
"The earnings growth hasn't been particularly strong, and yet here we are at record prices," observed FactSet senior earnings analyst John Butters.
Blending the earning of the Dow components that have reported earnings with analyst earnings estimates for those few Dow earnings are yet to report, FactSet finds that the Dow is looking at earnings that have fallen 3 percent from the first quarter of last year.
For traders, that presents a riddle: How has the Dow managed to soar even as profits have sunk?
"I would definitely say the Dow is rally off of futures expectations, rather than what happened last quarter," commented Anthony Grisanti of GRZ Energy. "So guidance going forward will be extremely important."
Indeed, FactSet finds that over the next four quarters, analysts foresee earnings growth of 5.5 percent or more. That would be the strongest growth the Dow has recorded since the second quarter of 2012.
"Looking ahead, the expectation is for a pretty significant jump in earnings growth over the next couple of quarters," Butters said.