January 2023

Dow Jones futures drifted lower on the first trading day of the year amid rising concerns about the global economy. They eased by 60 points on Monday morning to $33,163, which was about 4.65% below the highest point in 2023. The blue-chip Dow index faces numerous risks and opportunities in 2023. Earnings growth risks The Dow Jones index declined sharply in 2022 as corporate earnings stumbled. Data published by Factset showed that earnings had their weakest growth since 2020 as companies contended with rising inflation and interest rates. 2023 will likely be a better year for corporate earnings because of encouraging comparisons for 2023. Also, the economy will likely be much better during the year. For example, data published last month showed that inflation declined modestly in November. Falling inflation and a weaker US dollar index will likely be a positive catalyst for corporate earnings in 2023. The US dollar index has plunged by more than 10% from its highest point in 2022. Data compiled by Factset shows that a top-down earnings estimate of the S&P 500 index will be about $235. Federal Reserve risks The other important risk that will move the Dow Jones futures will be the Federal Reserve. In 2022, the Fed embraced an extremely hawkish tone as it fought the soaring inflation. The bank hiked rates by 400 basis points. There are signs that these hikes have had an impact on inflation, which has dropped to 7.3%. However, prices have dropped at a slower pace than expected. There is also a risk that the Fed will drag the US and other countries into a recession. Indeed, in a report, the IMF said that a third of the world will face a recession in 2023. China risks The Dow Jones faces another China risk in 2023. In 2022, the main risk was on the Covid-zero strategy that led to a major shutdown. As a result, many Dow Jones constituents with exposure to China like Nike struggled. Most analysts expect that China will resume to growth in 2023. However, there is still a likelihood that the Chinese economy will continue struggling in 2023. Besides, key parts of the economy like technology and real estate remain in trouble. Another China risk is the ongoing supremacy war with the United States. There is a possibility that tensions between the two countries will continue rising. Dow Jones futures energy risks Another key risk for the Dow Jones in 2023 is energy. Historically, the Dow Jones index does well in periods when energy costs are stable. In 2022, it pulled back as oil and gas prices remained at an elevated level. 2023, as I wrote here, presents a major challenge for the oil market. In all, analysts at Goldman Sachs and Morgan Stanley expect that oil prices will remain at an elevated level in 2023. While this will benefit companies like Chevron, it will hit most Dow Jones constituents.