After GE's miss, analysts' forecasts get cloudy

This isn't the way investors wanted to head into corporate earnings season.

General Electric Co.'s first-quarter profit results, announced Friday, were a bomb. The conglomerate fell a mile short of analysts' estimates, triggering a heavy stock market sell-off.

Wall Street is all about expectations, and GE's report showed that analysts haven't at all been realistic in assessing the effects of the deteriorating U.S. economy on the mega-company's bottom line.

Now, with earnings-reporting season kicking off in earnest next week, the question is: Are profit expectations likewise too high for many other firms -- even though analysts already have shaved their estimates substantially?

If there are a lot more GE-like shockers out there, the stock market could slide back into the soup, just as many investors were hoping the worst was over.

The GE report "certainly reduces my confidence in my earnings projections for the quarter," said Edward Yardeni, head of Yardeni Research Inc. in Great Neck, N.Y. "Earnings are starting to bring home the reality that the economy is weak."

Two other reports this week also warned of trouble. Aluminum giant Alcoa Inc. on Monday said high energy costs helped push profit down 54% in the first quarter.

On Wednesday, United Parcel Service Inc. said its quarterly results would be as much as 12% below expectations because of rising fuel costs and waning package shipments.

Earnings matter, of course, because that's ultimately why most people buy stocks -- for a share of income growth, either in the form of a rising stock price or rising dividends.

From 2003 through 2006, corporate America was on an amazing profit-growth streak: Operating earnings of the Standard & Poor's 500 companies, on the whole, rose at a double-digit percentage pace for 14 straight quarters, according to data tracker Thomson Financial.

In the first half of 2007, that growth rate slowed to single digits. And in the second half of the year, overall S&P 500 earnings declined for the first time since 2002.

But the drop in earnings last year wasn't as bad as it looked. It stemmed mostly from huge loan write-offs at banks and brokerages. In the fourth quarter, for example, operating profit of the S&P 500 companies slumped 25% from a year earlier. However, earnings rose in seven of the 10 industry sectors in the S&P.

Only the financial sector, the commodities sector and the consumer-discretionary group, which includes automakers and home builders, showed declines in earnings.

On the flip side, earnings jumped 25% in the fourth quarter for technology companies as a group, Thomson data show. Profit was up 20% for energy companies and 14% for industrial firms.

At the beginning of January, optimism about first-quarter earnings still was high on Wall Street. But as the credit crunch deepened in the winter, oil prices surged and consumer confidence dived, analysts sharply pared their expectations for many firms.