The big news on the stock market Friday was disappointing earnings news from General Electric Company (NYSE/GE). The company cuts its 2008 profit forecast Friday, while the latest quarterly earnings declined for the first time in five years.
GE’s earnings dropped 12% in its latest quarter. The stock market doesn’t like to be disappointed and that’s exactly what happened with GE stock on Friday. As recent as March 13, CEO Jeff Immelt said that earnings for 2008 were “in the bag.” So, when GE didn’t deliver on its earnings forecast, the stock got whacked.
There’s a relatively old saying in investing: “So goes GE, so goes the rest of the market.” This adage is based on the belief that GE is such a large and diversified company and that whatever is going on financially at the company is usually a good indication of what is happening in the economy.
GE was punished by the stock market Friday for missing its earnings forecast. The stock had its biggest daily loss in value since October 1987, with GE’s market value falling by almost $50.0 billion in a single day on Friday.
I believe that investors overreacted to GE’s missed quarterly profit target and oversold the stock. In fact, I wouldn’t be surprised to see GE’s stock rally higher this morning. Earnings for one quarter dropped 12% and the stock value drops 13%? Talk about an unforgiving market.
We need to remember that we are only talking one quarter’s performance here. GE is one of the best managed companies in the world. Should the company be successful at making the current quarter a better one… and get closer to its original forecast… we’ll definitely look back at Friday’s sell-off in GE stock as an overreaction.
GE still managed to make a profit of $4.36 billion in its latest quarter, while revenue at the company actually rose a healthy eight percent. With all that has been going on with the economy, I believe that GE still delivered a good quarterly report. It’s the missed expectation of the market and investors that brought down the stock on Friday.
If this is as bad as it gets for GE, the economy is not in that bad of shape. Should GE earnings continue to disappoint, then the economy is in worse shape than originally thought. My money is on the worse being behind for GE.