Stocks plunged Friday after weak earnings from corporate giant General Electric (GE) raised serious concerns about whether companies can sustain profits in a weak U.S. economy.
Also jolting the stock market were a drop in a closely watched gauge of the mood of the U.S. consumer and a jump in import prices.
On Friday, the Dow Jones industrial average lost 256.56 points, or 2.04%, to 12,325.42. The S&P 500 index fell 27.72 points, or 2.04%, to 1,332.83. The Nasdaq composite index shed 61.46 points, or 2.61%, to 2,290.24.
Activity in the broader market was negative, with 24 stocks declining in price for every 7 that gained on the New York Stock Exchange. The ratio on the Nasdaq was 23-6 negative.
The stock sell-off accelerated into the close of trading on Friday, suggesting investors are worried about next week, when several other large companies follow GE's lead by reporting first quarter earnings. Among the many firms unveiling financial results next week are Intel (INTC), Coca-Cola (KO), IBM (IBM), J.P. Morgan Chase (JPM), Xerox (XRX), Schlumberger (SLB), Caterpillar (CAT) and Citigroup (C).
GE's poor earnings were mostly to blame for the drop in stocks on Friday, but it was also a case of "more jitters" just before "earnings season really gets rolling next week," says Chris Johnson of Johnson Research Group. Looking on the bright side, most already are expecting a depressing earnings season, so it won't be hard for companies to beat expectations. "We have investors that are expecting bad news, and that helps soften the blow," Johnson says.
Stocks fell from the beginning of the week, with the S&P 500 off 2.74% since the start of trading on Monday. "Not a whole lot of real good news [came] out this week," says John Wilson, chief technical strategist at Morgan Keegan. Higher inflation and a weakening economy top investors' worries, he says.
On Friday, bond prices rose, while gold futures were down on the perception economic slowdown will reduce demand for the yellow metal. The dollar was mixed against major currencies, while oil futures moved slightly higher.
General Electric's earnings were closely watched, both because of the size of the $320-billion conglomerate and because its diverse businesses might give early clues to how other companies are faring in the economic slowdown.
"Demand for our global infrastructure business remained strong," chairman and chief executive Jeff Immelt said in a statement, "but our financial services businesses were challenged by a slowing U.S. economy and difficult capital markets.”
The company posted earnings of 44 cents per share, at least 6 cents lower than GE had predicted. The "extraordinary disruption in the capital markets in March" hurt earnings by about 5 cents per share, Immelt said.
"GE's disappointing earnings report suggests [the] economy might have a steep contraction," said S&P MarketScope. Jay Collins of DT Trading said: "GE didn't bring good earnings to life this morning, dropping the pneumatic hammer on the head of the market, sending the S&P reeling."
GE shares ended the day down 12.8% to 32.05. That's close to the stock's 52-week low of 31.65.
On the economic front, the University of Michigan U.S. consumer sentiment index plunged to 63.2 for the preliminary April reading -- a 26-year low. This is well below the 69.5 reading that markets had expected, and the final 69.5 print in March. The current economic conditions index plunged to 78.4 from 84.
2 in March, while the future outlook index dropped to 53.4 from 60.1 the month before. The 1-year ahead inflation median rose to 4.8% from 4.3%. The weaker than expected report should extend the downward pressure on Treasury yields and stocks, says S&P Economics.
Also Friday morning, a report showed U.S. import prices jumped 2.8% in March, while export prices rose 1.5%. Petroleum prices surged 9.1% and are up 60% from a year ago.
Rising import prices are adding to inflation, says Bear Stearns economist John Ryding. "With energy prices still elevated and the dollar weak, we do not see this pressure reversing in the near future," he wrote. On the NYMEX Friday, WTI crude oil traded 30 cents lower at $110.41 per barrel.
Next week's economic news will include March retail sales on Monday, data on New York region manufacturing and producer prices on Tuesday, the March consumer price index and housing starts reports on Wednesday, and on Thursday the weekly jobless claims report and March's index of leading economic indicators.
Among other stocks in the news on Friday, Frontier Airline Holdings (FRNT) filed for Chapter 11 bankruptcy protection, a move it blamed on a credit card processor that was threatening to withhold larger proceeds from ticket sales. Frontier is the fourth U.S. air carrier to file for bankruptcy in the last two weeks, as high fuel costs take their toll on the industry.
Genentech (DNA) reported earnings of 84 cents, vs. 74 cents a year ago, as revenue rose 8%. Earnings beat analysts' estimates, but sales of major drugs like Avastin fell short. Analysts at Thomas Weisel have reportedly downgraded the stock to "market weight."
PDL BioPharma (PDLI) plans to pay out a special cash dividend of $4.25 per share, and spin off its biotech assets into a separate publicly traded company. The company said it expects royalty revenue of $240 to $260 million in 2008.
Trizetto Group (TZIX) will be bought and taken private for $1.4 billion, or $22 per share, by funds advised by Apax Partners.
Major European indexes were lower Friday. In London, the FTSE 100 index lost 1.17% to 5,895.50. Paris' CAC 40 index fell 1.27% to 4,797.93, and Germany's DAX index dropped 1.5% to 6,603.57.
In Asia, Japan's Nikkei 225 rose 2.92% to 13,323.73, while Hong Kong's Hang Seng index was up 1.99% to 24,667.79.
Treasuries rallied as equities fell in price. The ten-year note rose 24/32 to 100-12/32 for a yield of 3.45%, while the 30-year bond climbed 33/32 to 101-14/32 for a yield of 4.29%.