Disappointing Earnings Reports Rattle Wall Street

The New Year’s rally on Wall Street was interrupted Wednesday by the return of one of last year’s big worries -- the health of corporate earnings.

Stocks sagged after aluminum producer Alcoa reported a loss and computer maker Gateway gave a dour forecast, fanning fears about fourth-quarter earnings.

Gambling stocks added to a decline in the Standard & Poor’s 500 index after casino operators said quarterly results will fall short of Wall Street estimates due to disappointing holiday revenue. A rating downgrade of local telephone companies including BellSouth also weighed.

Companies will start posting fourth-quarter results in earnest next week. Investors, whacked by three straight down years in the market, are hoping this earnings period will bring signs of solid corporate profit growth.

“There are still a lot of companies that are going to report in the next week to three weeks,” said Andrew Baker, senior vice president of Nasdaq trading at investment bank Wedbush Morgan in Los Angeles. “There is a lot of data to come out, and there are still a lot of concerns internationally.”

The Dow Jones industrial average closed down 145.28 points, or 1.7%, at 8,595.31. The widely followed index gained almost 5.2% in the first three trading days of the year -- its best start to a year ever -- before stalling Tuesday and turning down sharply Wednesday.

The broader S&P; 500 index lost 13 points, or 1.4%, at 909.93. The technology-laden Nasdaq composite index lost 30.50 points, or 2.1%, at 1,401.07.

Losers led winners by 3 to 2 on the New York Stock Exchange and Nasdaq in active trading.

Like the Dow, the S&P; 500 has dropped for two straight sessions. But it’s still up 3.4% so far this year.

Some may take heart from historical data showing that a gain for the first five days of the year usually has signaled an advance for the full year -- something the stock market hasn’t pulled off since 1999.

Since 1950, that pattern has held true in 28 of 33 years. The exceptions were 1966, 1973, 1990, 1994 and 2002.

This year, stocks will be fighting geopolitical instability, worries about terrorism and continued concerns about the U.S. economy and corporate profits. Especially profits.

On Wednesday, Alcoa fell $2.53 to $21.85 after saying it will cut 8,000 jobs and sell struggling businesses as part of its sweeping restructuring.

“Alcoa provided the first peek at an industrial bellwether and it clearly shows that the recovery on the industrial side isn’t here yet,” said John Forelli, fund manager at Independence Investments. “It produced a mediocre earnings report, delivered weak guidance and announced layoffs. That hardly inspires confidence.”

Computer maker Gateway sagged 21 cents to $2.96 after warning aggressive sales promotions that crimped margins would widen its quarterly loss. Gateway also said it expected fourth-quarter revenue to be almost 12% below its previous “best-case” forecast.

Other computer stocks to fall included Dell Computer, which dropped 33 cents to $28.32, and Hewlett-Packard, which lost 45 cents to $19.50.

SunTrust Banks, closely watched because it is the first U.S. bank to report results, slipped 76 cents to $58.29 after posting a 5% drop in fourth-quarter profit.

In other highlights:

* Gold surged $6.60 an ounce to $353.90 in New York -- its highest close since March 1997. The rebound came as speculators jumped back in, convinced that gold has room to move up as long as the U.S. standoff with Iraq lasts.

* BellSouth dropped $1.27 to $27.65, Verizon Communications lost $2.71 to $40.91 and SBC Communications sagged $1.50 to $28.78 after brokerage UBS Warburg cut their investment ratings, saying the hoped-for regulatory changes in pricing laws probably will be delayed by legal battles.

* GM lost $1.63 to $38.21 after saying it probably will cut its expected rate of return on its pension fund from 10%, a move which would raise its costs, a GM spokesman said.

* Oil fell below $31 a barrel for the first time in 2 1/2 weeks, slipping 52 cents to $30.56. Prices have dipped recently as U.S. supply worries have eased.

Market Roundup, C5-6