Despite a bounce at the start of Tuesday, stocks tumbled the rest of the session as investors viewed an earnings warning from fiber-optic giant Corning (GLW) and saw signs that an economic recovery is still far from reality.
The earnings picture, as shown by Corning's warning, is gloomy. The No. 1 fiber-optic cable maker said after the close of trading Monday that it will cut jobs, shut down plants and take $5.1 billion in charges amid a telecommunications slump that could last another 12 to 18 months. Corning said results before charges will beat second-quarter estimates, but 2001 results will fall short of current expecations.
"We're in a period of rapid and decelerating profit contraction in industrial and technology companies," says Dan Veru, vice president of Palisade Capital. "You're seeing the confessional that this isn't a two, three quarter phenomenon. This is going to be a prolonged profit recession."
Wall Street is hoping the Federal Reserve's six interest rate cuts since the start of the year will soon have their desired effect of lifting corporate profits. Veru expects the Federal Reserve to continue lowering rates, "but it's going to take awhile before [rate cuts] stimulate demand." In the meantime, investors will likely have to sit tight until well after the second-quarter earnings season, which is expected to be a lackluster one overall.
Other analysts are looking for a summer rally. Few bright spots are expected over the summer, but August and September could bring a brief rally in stocks, Mark Finn, manager of Linder Asset Allocation Fund (LDDVX) told S&P's AdvisorInsight. But he predicts another downturn in equities as weak earnings lead investors to rotate into bonds. In the next few months, Finn plans to shift his portfolio more heavily into bonds, specifically corporates and mortgages.
Among Dow stocks, financial companies led the index lower. Offsetting weakness on the blue-chip index, shares of AT&T Corp. (T) gained ground after the telecom giant received an unsolicited $44.5 billion bid over the weekend from cable company Comcast Corp (CMCSK) for its broadband unit.
Other stocks on the move Tuesday included energy company Amerada Hess Corp. (AHC), which said it would buy Triton Energy Ltd. (OIL) for $2.7 billion in cash, raising its rank among global integrated oil companies.
After a morning bounce, the major indexes deteriorated. The Dow Jones Industrial Average tumbled 123.83 points, or 1.20%, at 10,175.57. The Nasdaq Composite lost 63.95 points, or 3.16%, to 1,962.76. Meanwhile, the broader S&P 500 index shed 17.26 points, or 1.44%, to 1,181.52.
U.S. Treasuries finished higher Tuesday after a rocky start. Emerging market woes and fresh equity declines put the icing on the cake, sending the front-end of the yield curve higher, then the middle.
On the data front, U.S. wholesale inventories rose 0.2% in May, in line with Standard & Poor's economic research unit expectations. April inventories were revised lower to a gain of 0.1%, from 0.3%. Meanwhile, sales rose 0.1%. Sales were also revised lower to a gain of 0.1% from 0.3%. The inventory to sales ratio rose to 1.32 from 1.31. These data shouldn't impact the markets, according to S&P.
Also, retail chain stores sales index rose 0.6% in the week ended July 7 after rising 0.3% the week before. Sales are generally on plan, according to S&P.
European stock markets finished lower as the promising open for U.S. stock markets faded. In London, the Financial Times 100 Index ended off 1.00 points, or 0.02% to 5,467.90. In France, the CAC 40 lost 53.97 points, or 1.07%, to 4,973.40. Germany's DAX Index slipped 53.54 points, or 0.91%, to 5,816.32.
Asian markets ended higher. In Japan, the Nikkei Index jumped 60.73 points, or 0.50%, to close at 12,300.41. Hong Kong's Hang Seng Index added 23.22 points, or 0.18% to finish at 12,713.90. By Amy Tsao in New York