The Fed May Disappoint Investors

Long-time readers of this column will know that I like to follow large-cap, bellwether stocks in order to develop a sense of the economy and the stock market.

One bellwether that you absolutely must follow is General Electric (NYSE/GE). This company just reported fourth quarter revenues that grew a solid 11% to $44.62 billion. This was slightly better than Wall Street consensus estimates.

Net income for the three months ended December 30, 2006 more than doubled to $6.58 billion, or $0.64 per share, up from $3.16 billion, or $0.30 per share. In the comparable year, the company took a substantial charge to earnings.

Looking ahead, GE reports that it expects its earnings per share from continuing operations to grow between 10% and 12% for all of 2007.

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Another bellwether stock that’s worth keeping an eye on is IBM (NYSE/IBM). This company just surprised the market with an exceptionally strong fourth quarter.

According to the company, its revenues grew 7.5% to $26.4 billion, up from $24.4 billion, slightly beating consensus revenue estimates. Earnings from continuing operations were $3.5 billion, or $2.26 a share.

Both IBM and GE’s stock prices have performed well over the last several months. The numbers illustrate that corporate earnings are solid.

Sometimes, Wall Street expectations can be a little too high. It’s very difficult for such large, international companies to generate double-digit growth.

What I get out of these numbers is that the economy is stronger and more resilient than many believe it to be. Even with the real estate sector taking a rest (which is well deserved), I’m beginning to take the view that fiscal 2007 isn’t going to produce the kind of economic slowdown that many are expecting.

This poses some difficulty for the stock market because investors want an interest rate cut this year. If corporate earnings stay this solid, the Federal Reserve may not take any action at all this year.