Earnings better than expected – so far
NEW YORK — General Electric Co. is one of those companies that Wall Street often looks to as a barometer of the overall market, and with good reason.
The Dow Jones industrial has its hands in everything, from movies and television to finance to heavy manufacturing — a microcosm of corporate America. And when it announced an 18 percent jump in earnings Friday, beating profit forecasts and issuing a strong outlook for 2005, investors should have been thrilled.
And yet the Dow fell more than 78 points Friday in what has become a typical performance in this fourth-quarter earnings season.
The earnings numbers are undeniably good: Of the 114 companies in the Standard & Poor’s 500 index that reported as of Friday morning, 75, or more than two-thirds, surpassed analysts’ profit forecasts. Another 20 matched expectations, while only 19 issued earnings that fell below estimates.
According to Thomson Financial, the blended growth rate for fourth-quarter earnings — combining actual earnings growth with estimates for companies that have not yet reported — is a healthy 16.5 percent, well above the 13 percent to 15 percent most market watchers expected.
Yet so far this year, the Dow is down 3.62 percent, the S&P 500 is off 3.63 percent, and the Nasdaq composite index has lost 6.49 percent.
Investors aren’t overlooking earnings entirely, as individual stocks have risen when their results met with Wall Street’s approval, but they have often failed to lift other stocks in their sectors. Apple Computer Inc., Intel Corp. and IBM Corp. all had strong earnings, for example, but the tech sector remains in a slump.
“There’s just no continuity between a given stock and the rest of the sector now,” said Hans Olsen, managing director and chief investment officer at Bingham Legg Advisers.
What’s going on? Depends on whom you ask.
“The overriding thing at the moment is the run-up in oil prices,” said Joseph McAlinden, chief investment officer for Morgan Stanley Investment Management.
Olsen has a different take. “People are concerned that the Federal Reserve is going to tighten up and raise rates, and that’ll really hurt future earnings growth,” he said.
And Rafi Zaman, managing director of U.S. equities at Dupont Capital Management, said, “Investors are trying to figure out which companies will continue to expand (profit) margins going forward and which will contract. That’s why there’s all this uncertainty in the marketplace.”
Needless to say, there’s a fair amount of uncertainty regarding the uncertainties facing Wall Street these days.
The surge in oil prices, responsible for stealing the market’s momentum Friday after GE’s earnings, has been a consistent factor in the January downturn. After peaking in the mid $50-per-barrel range in October, crude oil futures fell into the low $40s by December, only to spike near $50 again through January.
“As you look at the way the markets are reacting to this, investors are inferring from the movement of oil that, rather than being a cause of worsening inflation numbers, oil will slow down the economy instead,” McAlinden said. “People are worrying about the economy and earnings implications of this renewed rise in oil prices.”
Rising costs also feeds into Olsen’s interest rate theory, since rising oil prices and a weak dollar could trigger higher costs for raw materials — which will either erode corporate profit margins or spur companies into raising prices. That could, in turn, feed inflation and lead the Federal Reserve to quicken its pace of rate hikes.
“Earnings are really doing pretty well, with no real surprises,” Olsen said.