Earnings season is in full swing and emotions are flying high, as reflected in large moves in certain stocks that have either beaten expectations or fallen short.
The market's effusive reaction to a handful of positive earnings reports on Apr. 16 could represent a turn that augurs a more measured response to financial results, no matter how bad or good, in the weeks ahead. The Dow Jones industrial average jumped 256 points, or 2.08%, while the Standard & Poor's 500-stock index finished 30.28 points, or 2.27%, higher.
"The reported numbers at JPMorgan (JPM) suggest there's still a lot of stress in financials, but they didn't have a huge write-off beyond expectations in the [first] quarter," says Hank Herrmann, chief executive at mutual fund company Waddell & Reed Financial in Overland Park, Kan. That will fortify positive perception about the financials as a whole and helped fuel Apr. 16's rally, he adds.
Jack Welch's reaction
But he's not making any bets on what the market reaction will be when other financial firms post quarterly results, which he says are sure to include very big write-offs, in the weeks ahead.
Blue-chip conglomerate General Electric (GE) has garnered much of the media attention after reporting a 6% drop in first-quarter earnings on Apr. 11, instead of the 12% increase that Chief Executive Jeffrey Immelt all but promised investors only three weeks earlier. The company's profit of 44¢ per share missed Wall Street's consensus estimate of 51¢, and Immelt blamed (BusinessWeek.com, 4/11/08) /a> 5¢ of the shortfall on "extraordinary disruption in the capital markets in March."
The news was a shock to investors who are used to seeing GE report steady earnings growth every quarter. GE shares tumbled 12.8% on Apr. 11, their biggest one-day decline since Sept. 11, 2001.
Former GE CEO Jack Welch, speaking on CNBC Business News Wednesday morning, didn't hide his anger at Immelt for not keeping his promise that profits would rise 12% in the first quarter. Welch said: "Here's the screwup: You made a promise that you'd deliver this and you missed three weeks later," Welch said. "Jeff has a credibility issue. He's getting his ass kicked. He apologized."
Magnified impact
Welch said Immelt will be able to earn back the market's trust, and that all the questioning of what was wrong with the company and calls for it to be dismantled were overdone. "I don't believe the reaction to some of the disappointments have been as clear-headed as I would have liked," agrees Herrmann at Waddell & Reed. "When GE reported, there was a clamor about industrial weakness and condemning all industrial stocks as a result of GE's weakness."
Herrmann thinks that there was no justification for extrapolating GE's miss to the entire industrial sector, because much of GE's problem was tied to its financial services unit, which was tainted by the broader credit crisis. The bounce in industrial stocks on Apr. 16 seems to confirm that investors have rethought their assessment of industrials in the days since GE reported, he says.
Still, escalating worries about how long and deep the recession will be have contributed to the heightened emotions on the Street. "In an environment where there's more anxiety in general, you can argue that's going to magnify the impact, but only by a small percentage," says Alec Young, an equity strategist at Standard & Poor's Equity Research. "At the margin, the reaction might be worse in a recession [because] people are less forgiving—they're more paranoid." Standard & Poor's, like BusinessWeek, is a division of The McGraw-Hill Companies (MHP).