Profit Woes Hammer Stocks
U.S. stocks plummeted Monday, sending the Nasdaq composite index to its biggest loss in nearly five years, and U.S. bond yields rose for the first time in more than a week as traders and investors sought proof that the economy is slowing enough to keep inflation at bay.
Doubts about the strength of earnings at computer-related companies--fueled by Motorola and Hewlett-Packard last week and Applied Materials on Monday--were joined by signs that earnings at food companies and retailers may also be in jeopardy.
After a three-year run in which profits consistently beat forecasts, the news didn’t augur well for the bull market. Nearly 100 companies in the Standard & Poor’s 500-stock index have reported earnings this quarter.
“The profit picture doesn’t look that good,” said Bruce Simon, a money manager at Glenmede Trust Co. of New Jersey in charge of $500 million. Investors this quarter expected earnings growth of about 8% from a year ago, “but among technology companies, year-over-year earnings are down in many cases.”
The Dow Jones industrial average tumbled 161.05 points, or 2.92%, to 5,349.51, its biggest slide since March 8. Since peaking in May, the Dow is down 428 points, or 7.4%. International Business Machines and Eastman Kodak led the decline, in which not one of the 30 stocks in the average rose.
It was the Dow’s fourth-worst point drop ever, although in percentage terms it wasn’t close to being in the top 10.
The Nasdaq composite slid 43.11 points, or 3.91%, to 1,060.38, its worst one-day percentage loss since November 1991, bringing its slump since June to 15%. The Standard & Poor’s 500, representing 75% of the value of all U.S. stocks, tumbled 16.39 points, or 2.54%, to 629.8.
The Russell 2,000 index slid 8.97 points to 314.72, and the Wilshire 5,000 index dropped 168.54 points to 6,160.63.
Profit concerns weren’t the only cause of Monday’s slide. Rising Treasury bond yields reduced confidence that borrowing costs will fall this year and boost corporate profits, investors said.
The yield on the benchmark 30-year T-bond rose to 7.07% from 7.03% on Friday.
More than 21 stocks fell on the New York Stock Exchange for every four that rose. Limits on computer-guided trading were imposed twice in the same day by the Big Board for the first time since late May.
“People are looking for where the next bomb is going to come from, and they’re selling first and asking questions later,” said Charles Smith, money manager at Ft. Pitt Capital Management.
Money managers are lowering their sights on earnings because of this month’s weaker-than-expected profit reports.
Corporate earnings for all of 1996 may grow only about 5% from last year, and most of that growth may have already occurred in the first and second quarters, said Eric Miller, chief strategist at Donaldson, Lufkin & Jenrette Securities. In the third and fourth quarters, earnings may be little changed from last year’s record profits, he said.
Among Monday’s highlights:
* Applied Materials, down 2 5/8 to 25 3/8, led computer stocks lower when it said earnings won’t meet investors’ expectations because of slowing sales.
Other semiconductor stocks tumbled. Novellus Systems sank 4 to 34, Micron Technology sagged 2 3/8 to 19 and Texas Instruments declined 3 1/8 to 42 1/4. Motorola, last week’s big loser, fell 2 3/8 to 53 3/8 and Hewlett-Packard fell 1 5/8 to 76 1/2. IBM dropped 3 7/8 to 90 7/8. Cisco Systems, the most active stock in composite trading, dropped 3 1/2 to 51 7/8; Intel retreated 2 1/8 to 69 1/8 and 3Com skidded 4 1/8 to 37 5/8.
* Kodak, expected to report earnings today before the market opens, dropped 4 to 67. Investors are concerned that the firm’s earnings might not match forecasts of $1.23 a share.
* Airplane maker Boeing slid 2 1/4 to 86 3/4. European rival Airbus Industrie won orders for 45 aircraft and options on an additional 45 planes from the aircraft-leasing arm of General Electric.
* Weak earnings reports for Goodyear Tire & Rubber and CPC International led to declines. Goodyear fell 1 3/8 to 44 1/8; CPC, maker of Hellmann’s mayonnaise and Skippy peanut butter, dropped 2 to 68 1/2.
* Among oil issues, Chevron fell 1 7/8 to 59 1/4, Exxon dropped 1 5/8 to 88 3/8 and Royal Dutch Petroleum dipped 2 to 152 5/8.
Overseas markets were mostly lower. London’s FTSE-100 index dropped 0.8%, Frankfurt’s DAX index gained 0.25% and Tokyo’s Nikkei-225 rose 0.45% to close at 21,753.42.
* MAIN STORY: A1
How Major Funds Fared
A look at the percentage declines in shares of some major stock mutual funds on Monday. NAV is net asset value per share.
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Monday Monday Fund NAV drop PBHG Growth $23.87 -5.4% Brandywine 27.88 -4.0 AIM Weingarten 17.80 -2.8 Schwab 1,000 17.37 -2.6 Fidelity Value 50.89 -2.3 Janus 24.00 -2.3 Investment Co. of America 21.90 -2.2 Washington Mutual 22.28 -2.1 Fidelity Magellan 71.23 -2.1 Vanguard Windsor 14.85 -1.6 Average stock fund -2.8 S&P; 500 stock index -2.6
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Source: Lipper Analytical Services
