European shares fell by midday after U.S. conglomerate General Electric posted disappointing quarterly earnings and cut forecasts, while banks dropped on lingering concerns over a global credit crunch.
GE reported a 6% drop in profit as a slumping U.S. economy and credit crunch drove down earnings at its financial, industrial and healthcare units. It also lowered its earnings forecasts for the year.
"The earnings season is off to a bad start. You get earnings that are way below estimates and GE's a complicated story — one side of it is financial and the other side is industrial, so it's a good benchmark for the U.S. economy," said Philippe Gijsels, senior equity strategist at Fortis Bank.
"That's why (European) equity markets are reacting negatively, but I don't think this comes as a surprise."
Banks were down, with UBS off 1.5%, Royal Bank of Scotland 1.7% lower and Barclays down 2.7%, as investors' belief that the worst of a credit crisis was over seemed to waver.
"We can hope (bad news) will end at the end of 2008 or some point in 2009 … we'll have to see what the profitability of the banking sector after the subprime crisis will be when these 'sexy' products won't be around," Gijsels said of instruments such as collateralised debt obligations (CDOs).
Investors had initially taken comfort from positive corporate results in the U.S. on Thursday, after the world's biggest retailer, Wal-Mart Stores Inc raised its profit forecast, injecting confidence in European equity markets.
M&A TALK LIFTS TELECOMS
Telecoms were also up after Italian phone group Telecom Italia gained almost 1.7%, after one of its main shareholders said it favoured a merger with Spanish peer Telefonica.
Telecom Italia, which bought an indirect 10% stake in Telefonica last year, declined to comment. Shareholders meet to vote at their next assembly on Monday.
French telecoms and construction group Bouygues rose by 5%, with traders citing a rating upgrade on the company to "overweight" by Morgan Stanley.
The world's biggest confectionery group, Cadbury Schweppes lost 1.3% after it reported a modest 3% rise in first-quarter sales and warned economic conditions in 2008 would be challenging.
Oils gained, with crude trading around $110 a barrel, and heavyweight BP was up by 0.6%.
Across Europe, the British leading index of companies, the FTSE 100, was up 0.8%, the German DAX gained 1.3% while France's CAC added 2%.
