US stocks fell, sending the Standard & Poor's 500 Index to its biggest drop in three months, as EMC Corp and Advanced Micro Devices Inc said profits missed forecasts by half or more, undermining optimism that earnings will rebound this year.
Disappointing earnings "are likely to keep a cap on stock performance for the next several quarters," said Tom Van Leuven, a strategist at JP Morgan Securities Inc. "Expectations are still too high for the market in general and tech companies especially."
PHOTO: REUTERS
The S&P 500 fell 28.65, or 2.4 percent, to 1,190.59, for its biggest loss since April 3. The NASDAQ Composite Index dropped for a fourth day, falling 75.95, or 3.7 percent, to 2,004.16 and the Dow Jones Industrial Average sank 227.18, or 2.2 percent, to 10,252.68.
For the week the NASDAQ fell 7.2 percent as investors questioned whether the Federal Reserve's six interest-rate cuts in 2001 will spark a recovery in earnings this year. The S&P 500 lost 2.8 percent for the week while the Dow dropped 2.4 percent.
The NASDAQ has fallen 13 percent since late May as companies said profits this quarter would be lower than even the worst-case forecasts of analysts. The index, which is two-thirds technology stocks, gained as much as 41 percent from its 2 1/2-year low on April 4 as investors speculated that declining borrowing costs would spark a recovery in profits.
Of the 25 most active stocks, 24 declined, as did 81 of the 87 industry groups in the S&P 500.
More than 1 billion shares changed hands on the New York Stock Exchange, down 10 percent from the average for the past three months. Two stocks fell for every one that rose on the Big Board.
EMC slid US$8.43 to US$21.60 and was the most active stock. The No. 1 maker of corporate computer-data storage systems said second-quarter profit was as little as a quarter of analysts' forecasts.
The slowing economy caused big customers to scale back purchases and price competition cut into profits, EMC said, "The analysts weren't even close" with their estimates, said David Briggs, head of trading for Federated Investors Inc., which manages US$145 billion in Pittsburgh.
Advanced Micro slid US$7.84 to US$20.80. Intel Corp.'s main rival in the market for personal-computer processors cited falling chip prices for its disappointing sales and profit.
BMC Software Inc lost US$2.07 to US$20.68 after the maker of software for managing computer networks said slower-than-expected sales in Europe caused its fiscal first-quarter profit to trail forecasts.
"These are high-profile companies, particularly EMC," said Briggs.
Intel, the leading maker of computer microprocessors, lost US$1.36 to US$28.48. The Philadelphia Semiconductor Index lost 8.6 percent, its biggest drop in almost nine months.
In the storage industry, Emulex Corp, which makes networking switches and hubs used for data storage, fell US$6.85 to US$29.15 and Veritas Software Corp, which makes storage software, lost US$5.25 to US$57.01. Network Appliance Inc dropped US$.089 to US$11.78, and QLogic Corp lost US$7.46 to US$49.91.
Credit Suisse First Boston analyst Amit Chopra cut his rating on Emulex, Brocade Communications Systems Inc and McData Corp to "hold" from "buy," citing "continued erosion" in prices and slower spending by buyers of new computer equipment. Brocade slumped US$8.58 to US$32.19 and McData fell US$3.93 to US$17.97.
Among software stocks, Oracle Corp declined US$0.71 to US$18.22, PeopleSoft Inc dropped US$3.16 to US$40.85, and Microsoft Corp fell US$2.45 to US$66.06.
A report showing the US lost more jobs than expected last month had little impact on stocks. Many investors say they expect the Federal Reserve's six interest-rate cuts in 2001 to start benefiting the world's largest economy later this year.
The unemployment rate rose last month, matching a two-year high, and the economy lost jobs for a third straight month.
"The direction of the stock market will be based on corporate earnings and any type of forecasts for the rest of the year and maybe the beginning of an outlook for 2002,'' said David Rolfe, chief investment officer at Wedgewood Partners Inc., which manages $200 million in St. Louis.
Other companies that dropped after saying profits will disappoint investors were Tekelec, a maker of phone network switches, casino operator Harrah's Entertainment Inc, software maker Interactive Intelligence Inc, and EXE Technologies Inc, a developer of supply-chain software.
Tekelec dropped US$6.73 to US$18.12, Harrah's slid US$6.15 to US$29.64, Interactive Intelligence declined US$1.72 to US$8.30, and EXE lost US$0.49 to US$4.41.
The companies in the S&P 500 are expected to report a 17.6 percent profit decline in the second quarter, according to analysts surveyed by First Call/Thomson Financial. When the quarter began, analysts predicted a decline of 6.4 percent.
Optimism that earnings will bounce back in the second half is dissipating as well. Analysts now see a drop of 6.7 percent in S&P 500 profits this quarter and growth of 4.8 percent in the last three months of the year; on April 1 they forecast profit growth of 1.6 percent and 12.6 percent respectively.
Van Leuven said 2002 earnings forecasts remain too optimistic. He predicts S&P 500 profits will rise 6 percent next year, rather than the 19 percent analysts expect.
He recommends investors buy energy stocks such as Anadarko Petroleum Corp. and Nabors Industries Inc. because earnings expectations are low and attainable.
Van Leuven also recommends food and beverage companies, whose earnings are less subject to the ups and downs of the economy.
Investors are taking that advice. Flowers Foods Inc, Interstate Bakeries Corp and Tasty Baking Co were among 107 US stocks touching their highest price in at least a year.
Electricity-producers rallied after Calpine Corp., the San Jose, California, independent power company, reached an agreement to collect past-due payments from bankrupt Pacific Gas and Electric and to continue selling power to the utility.
The settlement gives Calpine US$267 million in past-due receipts and lessens the possibility the company will have to take a charge against earnings for money owed by the utility.
Calpine rose US$5.26 to US$42.62 and was the biggest gainer in the S&P 500 Mirant Corp advanced US$1.11 to US$36.77, El Paso Corp rose US$0.76 to US$53.21, and Reliant Energy Inc added US$0.86 to US$32.40.
The Russell 2000 Index of small stocks fell 9.47, or 1.9 percent, to 483.26 and the Wilshire 5000 Total Market Index, the broadest measure of the US stock market, dropped 256.97, or 2.3 percent, to 11,059.56.
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