Dow Futures

The Dow Jones Industrials (INDEX: ^DJI  ) jumped a full 1.2% this week, after several big-name companies reported strong earnings. Three in particular stood out.

Travelers
Last quarter, Travelers fell 4% after it reported weak underwriting and investment results. But this time, the insurance giant soared on indications by management that underwriting rates may finally be increasing after a long period of soft pricing. Combine this better pricing with (hopefully) fewer natural disasters that plagued the company last year, and we could see much better underwriting performance. Earnings per share also rose from $1.92 to $2.02, though that was due to a smaller share count; net income actually declined because of investment losses and a big tax gain last year.

Microsoft
On Thursday night, Microsoft reported that it earned $0.60 per share — $0.02 higher than analysts had forecasted. Although its small but-growing entertainment unit had a weak quarter, its larger divisions — Business, Windows, and Servers and Tools — all saw sales growth. That’s a good sign for the company, particularly with Windows 8 set to premiere later this year.

Wal-Mart
The discount retailer doesn’t report earnings until May, but there are several possible reasons it might have popped on Tuesday. The IMF raised its estimate for global GDP growth to 3.5% from 3.3%. The company also announced that it will be beefing up its India e-commerce team. Finally, Coca-Cola (NYSE: KO  ) reported strong earnings on 5% global volume growth, while Goldman Sachs raised its valuation estimate for Kraft — signs, albeit oblique, that investors could have taken as evidence for a good retail quarter.

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The Dow Jones Industrial Average (INDEX: ^DJI  ) ended a phenomenal quarter yesterday, gaining 994 points, or 8.1% over the past three months. U.S. stocks also had a solid week, with all three major indices finishing the week in the black, helped up by some fairly upbeat reports on the state of the economy and encouraging signs from Europe. The Dow was able to end the week up 131 points, or 1%.

But there were three stocks in particular that solidly outperformed the Dow this week.

Pfizer hit a four-year high this week, after a Goldman Sachs note to investors saying CEO Ian Read indicated that the company may be willing to split up even further. Goldman analyst Jami Rubin wrote in the note that the company is looking at “strategic alternatives” for its animal health and nutrition businesses. “If the pipeline is successful and drives meaningful top-line growth, management will want to separate the businesses so investors can better value the pharma business,” Rubin wrote. Clearly, investors are excited about the possibility of a full-scale breakup a la Abbott Laboratories.

Cisco finished the week up around 3% and is now up nearly 17% on the year. The company announced plans to acquire ClearAccess, a private company that makes software for Internet service providers. Cisco said that ClearAccess’ software will help service providers manage mobile and residential devices and will use Cisco’s existing network to allow customers to manage their networks across a wide range of devices. Finally, Coca-Cola climbed steadily in the past three days to finish the week up 3.5%. The company will be looking to keep its momentum into next week after slightly underperforming the Dow so far this year, rising 6% versus the Dow’s 8%.

Outside the Dow, one of the companies making the most headlines this week was Research In Motion (Nasdaq: RIMM  ) . RIM reported earnings Thursday afternoon and missed on both revenue and profit. Taking out one-time items, sales dropped a whopping 25%, the company’s first revenue decline in seven years. RIM also announced that it will stop giving guidance, an ominous sign for the company’s future. Still, the stock ended the week up more than 7%, after candid remarks from the company’s new CEO, Thorsten Heins, garnered praise from analysts and led many to wonder whether the company could be an acquisition target of tech giants Microsoft or Amazon.com, among others.

The big picture
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The stress tests are out. The results helped to send Bank of America (NYSE: BAC  ) up 22%, JPMorgan Chase (NYSE: JPM  ) up 9%, and the Dow Jones Industrials Average (INDEX: ^DJI  ) up 2% for the week.

JPMorgan received permission to increase its dividends and stock buybacks. Bank of America soared after it didn’t fail the tests. Of course, the test parameters focused on the results of hypothetical economic conditions, rather than worst-case losses from its legal challenges.

Of the 19 institutions tested, Citigroup (NYSE: C  ) , SunTrust, MetLife, and Ally Financial were the four to fail at least one scenario.

Too-big-to-fails Wells Fargo (NYSE: WFC  ) , Goldman Sachs (NYSE: GS  ) , and Morgan Stanley managed to stay above the 5% Tier 1 common equity threshold.

Despite lobbying from the banks to keep details of the results secret, the Federal Reserve went ahead and released lots of useful information. Here’s how the 19 fared:

The blue amounts are losses under the test’s scenario; red is how much capital would be left over after the carnage.

Although banks would take big losses on their mortgage, credit card, and commercial and industrial loans, the biggest source of losses would come result from trading and counterparties, which should remind us all that a strong Volcker Rule is so important.

Now, the test had its limitations. For one, the worst-case assumptions modeled a more severe recession than the one we just had — mortgage losses, high unemployment, gross domestic product decline, and low interest rates. Kudos for using much more stressful assumptions than in the flimsy 2009 tests. And given the liquidity trap we’re in, it makes sense that a hypothetical double-dip recession sometime over the next few years would be deflationary rather than inflationary, just like the last one. But hopefully in future tests we’ll also get to see how well banks would cope with alternative kinds of financial crisis. At the very least, it would be nice to see what affect moderately rising rates would have.

More importantly, as FDIC Chair Sheila Bair recently pointed out last week, the test looked at risk-based capital levels. Future versions of the test should look at overall leverage, too, since “risk-based” can be a somewhat squishy metric.

Furthermore, the tests, which focused on solvency, aren’t a guarantee that we won’t see another financial panic, with a shadow banking run once again crashing the entire system.

It’s encouraging to see banks performing decently under the tested scenarios, since solvency would decrease the odds that we’ll have to undergo another financial crisis and possible bailout during the next recession. But we still have a long way to go to protect ourselves from the next crisis.

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Today, Bank of America (NYSE: BAC  ) and JPMorgan Chase (NYSE: JPM  ) led the Dow Jones Industrials (INDEX: ^DJI  ) up 0.44%, to 13,252.76, and the broader banking sector helped lead the S&P 500 up 0.60% to close above 1,400 for the first time since 2008. 

The Federal Reserve’s announcement of banking “stress test” results on Tuesday has led to surging bank share prices. The KBW Bank Index is up 8.8% since Monday’s close, including a 2.7% rise today. Here’s how the six largest banks have done (note that all six were part of the 19-bank stress test):

Note that even Goldman Sachs, which has been dealing with the resignation letter from hell, is up. So is Citigroup, which failed one part of the stress test (but only because it got too aggressive in asking for higher dividends and share repurchases) and will have to resubmit its capital plan later this year.

Why has the market responded so favorably? I believe it’s because the stress tests weren’t the watered-down tests we’ve seen from the U.S. and Europe in the past. For its worst-case scenario, we’re talking 13% unemployment, a Dow that falls under 6,000, and a housing market that crashes 21%. Even in that scenario, every bank but Ally Financial exceeded the Fed stress-test minimum 5.0% Tier 1 common capital ratio, if dividends and share repurchases are restricted.

So you can thank the Fed for conducting a plausible stress test and publicizing the robust results bank-by-bank for this banking rally. In an industry with little balance-sheet visibility, this was a step in the right direction.

On Wednesday, the Dow Jones Industrial Average (INDEX: ^DJI  ) rose throughout the day to end at its highest level since July, after Goldman Sachs reported earnings above average expectations, easing investors fears over fourth-quarter bank earnings. Thursday could be an even bigger day, with Bank of America (NYSE: BAC  ) and other stalwarts reporting earnings. First, check out today’s performance.

Bank of America as well as four other Dow components all report earnings Thursday. The Dow’s performance will probably be predicated on these stocks.

For financials, this week Citigroup posted earnings below expectations, while Goldman Sachs and Wells Fargo reported above-average earnings. Analysts have varying expectations for Bank of America, as it is much more similar to Citigroup than it is to Goldman Sachs or Wells Fargo. It will certainly be an interesting one to watch. Analyst expectations for American Express are much narrower than for Bank of America. Fool analyst Dan Caplinger recently took a look at American Express and called it “the value play in the card industry.“

On the technology side, Motley Fool tech editor Eric Bleeker believes tomorrow could be tech’s biggest day of the quarter as blue-chip tech stocks IBM, Intel, and Microsoft all report after the bell, as does Google. These four stocks should provide a good bellwether for the rest of the tech sector.

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The Dow Jones Industrial Average (INDEX: ^DJI  ) is alive and kicking today. As of this midday writing, it’s up 0.83% despite Citi missing earnings expectations and opining that Europe “remained a dark cloud” during its earnings call.

Since turmoil in Europe has been driving the market for months, it might shock investors the Dow is trading up sharply on the first trading day after S&P downgraded the credit ratings of nine European countries. However, today’s rise is another time to reflect on the continuing ascent of China’s global importance.

The country reported GDP growth of 8.9% last quarter, which is a decrease from the 9.7% growth rate from last year, but it still beat estimates. To put that in perspective: most developed countries have seen their GDPs slide backward in recent years.

How important is China to the global economy? Just take a look at this chart we’ve compiled. It shows the amount of time it takes China’s economy to grow enough to “create” economies the size of other countries. As Goldman Sachs‘ Jim O’Neil put it, “China creates a new Greek economy every four months.” 

Source: IMF. All GDP levels at purchasing power. Includes author assumptions for growth rates going forward set at 8% to 9%.

Ensuring that China continues rapidly growing while America and Europe tread water is extremely important for the American companies that make up the Dow.

Within the next four years, McDonald’s (NYSE: MCD  ) has plans to open a new store in China on a daily basis, and has grown profits in its Asia-Pacific region by nearly 250% over the past five years! Intel (Nasdaq: INTC  ) takes pains to call out strength in China and other emerging markets as its key growth driver in recent years. China recently became the world’s No. 1 PC market, while the United States has seen PC growth fall. Increasingly, Intel’s fate is intertwined with growth in China. The list of Dow companies relying on China for growth goes on and on…

So while Europe might hog the economic spotlight, investors are wise to be just as aware about China’s growth and how it drives their investments.

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As the Dow (INDEX: ^DJI  ) shot up almost a percent in the early going today (mostly on China economic news), two American megabanks reported earnings this morning: Wells Fargo (NYSE: WFC  ) and Citigroup (NYSE: C  ) .

If you’re looking for the numbers, Citi reported pre-provision fourth-quarter revenue of $17.2 billion, resulting in earnings of $1.16 billion, or $0.38 a share. Wells hit $20.6 billion in pre-provision revenue, resulting in $4.1 billion in profit, or $0.73 a share.

While Citigroup disappointed due largely to its investment banking performance (Dow component JPMorgan (NYSE: JPM  ) reported similar problems last week), Wells Fargo beat last year’s results and analyst expectations.

The silver lining in Citi’s report was the improvement in loan performance. This echoes JPMorgan’s results last week. Wells’ performance makes sense in this context. It focuses on retail and commercial banking (i.e., lending) rather than investment banking.

Although each was up in early going, all of this spells bad news for Dow component Bank of America (NYSE: BAC  ) , Goldman Sachs, and Morgan Stanley, each of which reports later this week. The former has significant investment banking activities and the latter two are pure investment banks.

So, it’s a good day for Wells, a bad day for Citi on the big-bank front. If you’re looking for a quality smaller bank, I detail a stock that’s flying under the radar in our brand-new free report: “The Stocks Only the Smartest Investors Are Buying.” I invite you to take a free copy to find out the name of the company I believe Warren Buffett would be interested in if he could still invest in small companies.