Dow Plunges 195.93 on Poor Profit News

The high-flying stock market took a drubbing Thursday from investors who are growing uneasy that the outlook for many U.S. companies--especially in light of Asia’s economic crisis--might not justify the market’s lofty level.

The Dow Jones average of 30 industrial stocks, which only a week ago set a record high, tumbled 195.93 points to 8,932.98, its fourth straight loss.

Some observers, though, said the market’s stumble was overdue--and necessary to let some financial ballast escape after stocks’ recent sharp rally.

The decline, which may not have fully run its course, could clear the way for yet another surge in prices later on, analysts noted.

Thursday’s slump was the sixth-worst daily point drop in history for the blue-chip Dow. But because the market is near record levels, the decline amounted to only 2.2%, nowhere near record levels.

Even so, it was an ugly day on Wall Street, as share prices slid across the board in heavy trading.

Many of the market’s big names, including Sears, Roebuck & Co., Boeing Co. and Lucent Technologies Inc., suffered heavy losses. So did scores of stocks in a wide range of fields, from golf-club maker Callaway Golf Co. to soft-drink giant PepsiCo.

The main problem rattling the market is the increasingly murky prospect for the growth of corporate profits--the primary engine that drives stock prices.

Already there has been plenty of evidence that Asia’s economic problems are denting sales and profits of many U.S. companies. Boeing, Callaway and chemical giant DuPont Co. were added to that list this week.

Investors also fret that the situation could get much worse before it gets better, setting the stage for disappointing announcements from many more U.S. companies later this year.

A. Marshall Acuff, investment strategist at brokerage Salomon Smith Barney Inc. in New York, said the market had rallied in recent weeks on reduced concerns about Asia’s economy and on optimism about corporate profits. “But now we’ve got the mirror image of that,” he said, as more companies report subpar second-quarter profits.

And investors got a reality check on Asia’s woes Wednesday from Alan Greenspan, chairman of the Federal Reserve Board, who said that the region’s crisis has “no end in sight.”

All of which is prompting some investors, from billion-dollar mutual funds to individuals trading on the Internet, to sell and cash in some of the profits the market’s remarkable rally this year has generated.

“The basic problem is that [stock] prices are not cheap and the earnings reports have noise in them. That’s causing people to shoot first and ask questions later,” said Buzz Hussey, a market strategist at the investment firm Dain Rauscher Corp. in Dallas.

Indeed, despite the market’s nose dive Thursday, the Dow index still is up 13% for the year so far. Some market measures are doing even better: The blue-chip Standard & Poor’s 500 index is up 17%, and the Nasdaq composite index, which includes many popular high-technology stocks, is up 23%.

But other statistics are signaling the bull run is weakening, analysts said.

The market’s decline this week--which has shaved 404.99 points, or 4.3%, from the Dow since it closed at a record 9,337.97 a week ago--follows five weeks of sharp gains in a relative handful of big-name stocks.

That rally was faulted by many analysts, who noted that investors were crowding into a few blue-chip names while the vast majority of stocks showed meager gains.

Merrill Lynch & Co. last week calculated that 40% of all stocks trading on the Nasdaq Market--which is also home to most small-company stocks--still were down 30% or more from their highs earlier in the year.

And because blue-chip shares had been one of the last groups holding up the market, a sell-off in those stocks also raises questions about the potential for a significant setback on Wall Street.

Michael Metz, chief equity strategist of the investment firm CIBC Oppenheimer Corp. in New York, said the weakening outlook for corporate earnings has sparked a change in market psychology. Now, money managers are pulling out of stocks when they get a chance rather than reflexively buying when the market dips, he said.

Corporate profits soared from 1993 to 1997 amid an ideal U.S. economic situation: a growing economy, relatively low interest rates, declining inflation (what’s known as disinflation) and rising employment and consumer spending.

But to Metz and others, not only is Asia’s downturn wreaking havoc on corporate earnings, there’s also a strong likelihood that inflation will grow at a faster-than-expected pace next year, rising 2% to 2.5%.

“So earnings momentum and the disinflation scenario are both suspect--and those are the underpinnings of the whole market,” Metz said.

Howard Gleicher, chief executive at Metropolitan West Capital Management in Newport Beach, said he would not be surprised if, in the near term, the Dow and other blue-chip indexes fell 15% to 20% from their recent peaks.

“Giving up 15% would be healthy,” he said, considering the market’s stunning gains since 1994. Such a pullback, if contained, could help set the stage for another market advance into 1999, Gleicher and other experts contend.

At the same time, some experts don’t believe Wall Street is headed for a genuine bear market--usually defined as a decline of 20% or more. The last such bear market occurred in 1990, after Iraq invaded Kuwait.

Robert Bissell, chief investment officer at Wells Capital Management in Los Angeles, said that despite weaker earnings growth at many companies, he doesn’t see it as a sustained problem. Rather, he expects earnings to start rebounding later this year and in 1999, partly as Asia’s situation improves.

“For me to turn bearish, I’d have to see flat or down earnings in the fourth quarter or in the first quarter of 1999,” he said.

Thomas Galvin, chief equity strategist for Donaldson Lufkin & Jenrette in New York, said the market probably will be unsettled until September, when the situation in Asia and for U.S. earnings becomes clearer.

In the meantime, he said, many investors will “sit on the sidelines and go to the beach.”

Times staff writer Thomas S. Mulligan in New York and the Associated Press contributed to this story.