Why These 2 Stocks Made the Dow Miss the Market Rally

The broader stock market continued its bullish move on Thursday morning, with the S&P 500 (^GSPC 1.36%) opening the day higher by about 1%. But the Dow Jones Industrial Average (^DJI -0.35%) wasn’t able to generate the same enthusiasm among investors, and the result was a drop of more than 200 points in the opening minutes of today’s trading.

Among the culprits holding the Dow down on Thursday were two companies that released their latest financial results. Honeywell International (HON -2.27%) and Merck (MRK -3.17%) are among the Dow’s 30 stocks, and neither was able to deliver everything that their shareholders had wanted to see in their quarterly reports.

Read on to learn more about what was so disappointing about Honeywell’s and Merck’s results and what impact they could have on the Dow.

Person looking disappointed while standng in front of an office window.

Image source: Getty Images.

Honeywell falls short

Shares of Honeywell International were down 3% early Thursday. Despite posting solid results for the fourth quarter, the industrial company’s outlook for the coming year wasn’t as favorable as shareholders had wanted to see.

Honeywell’s financials showed ongoing growth. Revenue of $9.19 billion was up 6% from year-earlier levels, even though the company had to wind down its Russian operations after the invasion of Ukraine. Adjusted earnings of $2.52 per share were higher by 21% year over year.

Strength in Honeywell’s aerospace, building technologies, and performance materials and technologies segments helped to offset weakness in the safety and productivity solutions division.

Despite confidence in its 2023 outlook, Honeywell wasn’t able to satisfy investors. The company expects strong growth among its aerospace and energy customers in the coming year, but it still sees 2023 sales of $36 billion to $37 billion coming in up just 2% to 5% from 2022 levels. Moreover, adjusted earnings of $8.80 to $9.20 per share would be anywhere from flat to up just 5%.

Honeywell stock held up quite well during 2022’s bear market, and its history of solid dividend growth has made it attractive to many investors. With higher-growth opportunities coming into ascendancy now, though, Honeywell’s defensive characteristics aren’t as attractive for those hoping for a big bounce in stocks that have been beaten down a lot more.

Merck closes a strong year, but investors don’t expect a repeat

Shares of Merck were lower by almost 2% Thursday morning. The pharmaceutical company’s fourth-quarter financial report highlighted a strong year for the company, but some investors nevertheless believe the future might not be quite as bright.

Merck posted revenue of $13.83 billion for the fourth quarter, rising 2% year over year as foreign currency impacts weighed heavily on growth. The biggest contributor to higher sales was its cancer treatment Keytruda, whose revenue jumped 19% to $5.45 billion and helped offset sizable year-over-year declines in sales from blood-sugar management drug Januvia and the COVID-19 antiviral Lagevrio.

For the full year, sales jumped 22%, boosting adjusted net income for 2022 by 40% to $19 billion. However, Merck did see a slowdown in profit growth in the fourth quarter, as adjusted earnings of $1.62 per share were down 10% from year-ago levels.

Investors also had some concerns about 2023 guidance. Merck expects sales of $57.2 billion to $58.7 billion, since sales of Lagevrio could fall sharply as the pandemic’s influence appears to wane. Full-year 2023 adjusted earnings of $6.80 to $6.95 per share would represent a pullback from the final 2022 figure of $7.48.

Merck’s performance in 2022 was outstanding, but investors seem to think it might be time to rotate back to stocks in other industries. That could be a continuing headwind for Merck throughout 2023.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck. The Motley Fool has a disclosure policy.