3rd Quarter Ends Sputtering; Apple Drags Major Indexes
The stock market’s third-quarter finishing kick was more of a stumble.
A dire earnings warning late Thursday by Apple Computer cost the company more than half its market value Friday and helped pull Wall Street’s major barometers sharply lower.
Declines in the Standard & Poor’s 500 and Nasdaq composite indexes erased most of Thursday’s strong gains and left each with a second straight quarterly loss and a mixed forecast for the rest of this year.
The Dow Jones industrial average, down 173.14 points Friday to 10,650.92, limped home with a 1.9% gain for the quarter. But the Dow, like the S&P; and Nasdaq, remains in negative territory for the year to date.
Many market watchers believe October could be another rocky month for stocks, marked by further warnings of lagging sales or profits at important companies.
But if “confession season” drags stock valuations down further, the market could be positioned for a powerful late-year rally, some of these same analysts say.
After all, they say, oil prices appear to have peaked and the euro’s long slide may finally have been halted, which could boost U.S. exports.
And as a sign of how far interest-rate fears have receded, Wall Street seems barely aware that the Federal Reserve Board’s rate-setting Open Market Committee meets Tuesday. The Fed is widely expected to sit still during this election season, especially with the economy apparently slowing and inflation no longer a major concern.
“The negative earnings environment has already been discounted,” said Anthony F. Dwyer, chief market strategist at Kirlin Securities in New York. “Any positive news could really spur stocks.”
But the big news was negative Friday. With Apple pointing the way down, Nasdaq sank 105.50 points, or 2.8%, to 3,672.82, to close the quarter with a 7.4% loss, on top of a 13.3% loss in the second quarter.
The S&P; shed 21.78 points to 1,436.51, and finished the quarter down 1.2%.
Apple, after announcing that quarterly profits could fall as much as 33% below forecasts, plummeted $27.75, or 52%, to $25.75. It was Apple’s biggest one-day drop and slashed $9 billion from its market value.
Other technology shares felt the pain. Hewlett-Packard, off $6.81 to $97, IBM, down $2.63 to $112.63, and Intel, off $2.88 at $41.56, were three of the Dow’s four biggest losers, accounting for 107 points of the drop in the blue-chip index.
Another earnings warning, this one from UAL, parent of United Airlines, pushed that stock down $2 to $42 on the New York Stock Exchange, helping to spread the gloom.
However, in the words of losing coaches everywhere, Friday’s game was closer than the score indicated. The number of gaining stocks actually outnumbered losers, 15-14, on the Big Board, while decliners held only a narrow 22-19 edge on the Nasdaq.
Similarly, the third quarter had its share of winners. Bargain hunting by investors helped boost results by small- and mid-cap stocks. Defense stocks, utilities, insurers, lenders and oil producers generally posted strong returns as well.
Third-quarter laggards included industries that were in the forefront of the extraordinary Nasdaq rally of late 1999 and early 2000: wireless-telephone companies and communications-equipment makers, to name two.
Among individual names, three Nasdaq glamour stocks, Qualcomm, JDS Uniphase and Cisco Systems, are down 60%, 35% and 31%, respectively, from their first-quarter peaks.
There is further damage to come, in the view of Edward Riley Jr., chief investment strategist at State Street Global Advisors in Boston. Riley noted that JDS Uniphase still sports a price-to-earnings ratio of well over 100 and Cisco’s is around 75.
Those are still terrific companies, but Riley thinks their valuations remain too high. Meanwhile, he added, lesser tech companies, especially in the Internet world, will continue playing a version of the TV series “Survivor,” as investors winnow through them trying to decide which have solid business plans and which “are going to be voted off the island.”
Earnings tracker First Call Corp. said Friday that although the number of profit warnings is running slightly higher now than a year ago, the size of the downward revisions is more modest. The third quarter of 2000 is still on track for a strong year-to-year gain of as much as 19%, the Boston-based firm said in a report Friday.
Thomas McManus, market strategist at Banc of America Securities in New York, doubts that earnings will finish that strong. He sees a 14% gain for the third quarter followed by only an 8% increase in the fourth quarter, as high energy prices dampen consumer demand.
Rising oil prices “are good for about 23 companies in the S&P; 500 and bad for the other 477,” McManus said. Although wholesale oil prices may indeed have peaked, the price you pay at the pump always falls more slowly, he said.
He expects a rash of earnings warnings in the next few weeks. Still, McManus added, “the tougher the October, the more the likelihood of a strong November and December.”
Alfred E. Goldman, chief market strategist at A.G. Edwards in St. Louis, is more bullish than most, calling for a strong fourth-quarter that will power the Dow to 12,000, up 12% from here, with financial services, health care and, yes, technology leading the way.
Among Friday’s highlights:
* Analysts who were hoping the third-quarter profit warnings had run their course were disappointed shortly after the market closed when Caterpillar, one of the 30 Dow stocks, said its quarterly profits would be below expectations.
Caterpillar shares, which fell 25 cents to $33.75 during regular trading, promptly plunged to $29 in after-hours trading. The stock stabilized at $31.
* The profit warning by United Airlines parent UAL set off a chain reaction among airline stocks, pushing the American Stock Exchange Airline Index down 3.5% on the day. Among those suffering collateral damage: AMR, parent of American Airlines, was off $1.88 at $32.75, Delta was down $1.81 at $44.38 and Northwest slipped $2.38 to $24.56.
Analysts noted that one of UAL’s biggest problems--summer flight delays and cancellations caused by labor unrest--rebounded to benefit competitors. Still, while they avoided the kind of labor trouble that hit United, these other carriers have been buffeted by rising fuel prices and widespread flight delays.
Market Roundup: C4
