Stocks Slide on Outlook Concerns
Stocks slid Thursday, knocking the Dow index down 2.1% amid growing unease about the outlook for corporate profits -- a concern that threatens to thwart the market’s recent revival.
Third-quarter earnings have been beating Wall Street’s greatly reduced expectations, on average, but many corporate executives have been cautious or outright dour in their outlooks for the fourth quarter and for 2003.
“Companies are making their earnings numbers through cost cutting, which you can’t do forever,” said Russ Koesterich, equity strategist at State Street Global Markets in Boston. “What’s most troubling is that in their guidance, companies are not showing any optimism that revenue growth is going to return. To get anything approaching a bull market you need top-line growth.”
In Thursday’s trading, the 30-stock Dow Jones industrial average sank 176.93 points to 8,317.34. Analysts said short-term profit taking also contributed to the drop: Through Wednesday, the Dow had surged 16.6% from the five-year low it reached Oct. 9.
The broader Standard & Poor’s 500 index shed 13.64 points, or 1.5%, to 882.50, and the technology-oriented Nasdaq composite sank 21.52 points, or 1.6%, to 1,298.71.
In moderate trading, losers outnumbered winners 9 to 7 on the New York Stock Exchange and about 8 to 7 on Nasdaq.
The setback for stocks spurred nervous investors toward government debt, pushing the yield on the benchmark 10-year U.S. Treasury note to 4.12% from 4.23% on Wednesday.
In this week’s crush of third-quarter earnings reports, companies such as AT&T; and Xerox have been recording profit achieved largely through cost reductions, while others such as United Parcel Service and chip-equipment maker KLA-Tencor have warned that fourth-quarter results could be disappointing.
Third-quarter profit for the S&P; 500 is likely to be up about 6% over a year earlier once all the company reports are in, according to data tracker Thomson First Call. But analysts’ expectations for the fourth quarter are falling fast: Profit growth now is pegged at 17%, down from 28% at the beginning of July. First Call expects those projections to keep sliding.
After cutting back on costs, companies have leverage that will serve them well if and when the U.S. economy gathers steam, strategists say, but the economic outlook remains questionable.
“Corporate America has been on a treadmill for the last couple of years, and I don’t know how much leaner it can get,” said Joseph Kalinowski, chief investment officer at New York-based brokerage Ehrenkrantz King Nussbaum. “Unless we see some decent economic growth, we could be in for another lackluster reporting season in the fourth quarter.”
Duke Energy dropped $1.06 to $19.08 on Thursday after the utility giant said earnings in the last quarter plummeted and warned of a potential shortfall in 2003.
Microchip Technology fell $2.97 to $22.68 after a profit report in which Chief Executive Steve Sanghi offered the kind of conservative outlook that has become common.
“The industry environment continues to be weak,” Sanghi said, citing flagging consumer confidence, the threat of a U.S.-Iraq war and the effect the West Coast port lockout might have on holiday sales.
In the biotechnology sector, MedImmune fell $3.05 to $24.30 after reporting a narrower-than-expected third-quarter quarter loss and reducing fourth-quarter projections.
In the hard-hit leisure sector, Starwood Hotels & Resorts Worldwide eased $1.20 to $22.72 after matching profit forecasts but lowering guidance for 2003.
The profit picture is not all bleak. Market optimists call the choppy, mild economic recovery reasonable, considering that last year’s recession was relatively tame. Custom chip maker LSI Logic rose 77 cents to $5.81 after reporting late Wednesday that third-quarter earnings beat expectations, thanks to a robust sales gain. AT&T; Wireless gained $1 to $6.45 after reporting an 18% rise in customers from a year earlier.
Market Roundup, C5-6
