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Mideast, Tech Worries Sink Stocks

An uncertain geopolitical climate joined Wall Street's uncertainty about earnings season to send stocks sharply lower Wednesday. Tech shares resumed their recent underperformance after a late rebound Tuesday that likely reflected short-covering, says Standard & Poor's Equity Research.

On Wednesday, the Dow Jones industrial average fell 121.59 points, or 1.09%, to 11,013.18, despite a nearly 1% bounce by Alcoa (AA) on the heels of its disappointing revenue report Monday. The broader Standard & Poor's 500 index dropped 13.92 points, or 1.09%, to 1,258.6. The tech-heavy Nasdaq composite tumbled 38.62 points, or 1.81%, to 2,090.24.

Volume declined. NYSE breadth was decidedly negative, with 23 issues declining for every 10 advancing, while Nasdaq breadth was 23-8 negative.

The earnings outlook has caused some Wall Street strategists to dial back their expectations for stocks. In a note released late Wednesday, Standard & Poor's Investment Policy Committee reduced its yearend 2006 target for the S&P 500 to 1315 (a full-year advance of 5%) from 1385 (an 11% gain). Among the risks S&P sees: Less than double-digit growth in second-quarter earnings, and the prospects of lowered second-half earnings growth, stemming from "an overly aggressive Fed, stubbornly high oil prices, and a rapid deceleration in estimated real GDP growth."

Geopolitical concerns returned to focus Wednesday. The U.S. and other world powers agreed to refer Iran back to the United Nations Security Council for possible punishment over the country's nuclear program. Major indexes extended losses after the news, while oil prices flirted with $75.

Elsewhere in the Middle East, Israel launched an assault in Gaza aimed at freeing a captured soldier. Lebanon's Hezbollah militants captured two more Israeli soldiers in an attack Israeli Prime Minister Ehud Olmert described as an "act of war."

Rising tensions abroad were weighing on sentiment in the markets, analysts say. "It's all geopolitical today," says Jay Suskind, co-head of capital markets at Ryan Beck. "Whether it was Iran or whether it's what's going on in Israel, the news just isn't great. North Korea we haven't talked about today, but there's a sense of a lot of instability out there around the world."

Earnings concerns were also in focus. IBM (IBM) was lower after J.P. Morgan cut its revenue target for the computer maker. "Being a bellwether stock, it's dragging down the whole tech sector, which has already been badly bruised," says Peter Cardillo, chief market analyst at S.W. Bach.

Fellow computer maker Dell (DELL) was also lower after UBS trimmed its earnings estimates for the company. Shares of rival Hewlett-Packard (HPQ) declined, as well.

Analyst comments also sank Apple Computer (AAPL). Shares of the computer maker dropped after a Credit Suisse analyst said the company may guide fourth quarter revenues below Wall Street's expectations when it reports third-quarter results next week.

Semiconductor stocks lagged in the wake of Tuesday's late-session rally on bullish news from KLA-Tencor (KLAC). Chipmaker Intel (INTC) was nearly 4% lower, while shares in Advanced Micro Devices (AMD) declined slightly.

In earnings reports, Genentech (DNA) was lower after the drugmaker said late Tuesday that sales of the colon-cancer treatment Avastin fell short of Street expectations.

Newspaper publisher Gannett (GCI) was down after posting an 8.3% decline in second-quarter earnings, in line with analyst forecasts, as revenue increased.

Other companies set to unveil quarterly results this week include PepsiCo (PEP) and General Electric (GE).

Outside of earnings, Microsoft (MSFT) was lower after European Union regulators fined the software giant $357 million in an antitrust case. Credit Suisse cut its price estimate on the stock by 11%.

Among other stocks in the news, Disney (DIS) was down following a report the company will cut its workforce and annual film output more than Hollywood had expected.

On the economic front, investors were assessing modestly upbeat trade data. The U.S. trade deficit widened to $63.8 billion in May, following a $63.3 billion reading in April, according to the Commerce Department. The report indicated stronger-than-expected trends for both goods and services, says Action Economics.

The trade numbers were positive for stocks, some analysts say. "Energy imports continue to be a drag on trade, but overall it looks like the report is pretty much in line with expectations," says Alan Gayle, senior investment strategist at Trusco Capital Management. "The good news is that global trade is continuing to expand."

A busy economic docket is in store Thursday. Data releases due during the session include weekly unemployment claims and the June budget report. Council of Economic Advisors Chairman Edward Lazear and Minneapolis Fed President Gary Stern are set to give speeches.

In the energy markets Wednesday, August West Texas Intermediate crude oil futures closed up 79 cents at $74.95 a barrel in volatile trading amid Mideast tensions. Meanwhile, a weekly inventory report showed a larger-than-expected decline in crude supplies.

European markets finished higher. In London, the Financial Times-Stock Exchange 100 index crept up 3.3 points, or 0.06%, to 5,860.6. Germany's DAX index gained 21.78 points, or 0.39%, to 5,637.82. In Paris, the CAC 40 index was up 27.34 points, or 0.56%, to 4,941.73.

Asian markets finished mixed. Japan's Nikkei 225 index declined 224.5 points, or 1.45%, to 15,249.32. In Hong Kong, the Hang Seng index inched higher 32.08 points, or 0.19%, to 16,522.21. Korea's Kospi index lost 3.75 points, or 0.29%, to 1,296.69.

Treasury Market

Treasuries steadied after initial price declines in the wake of the trade-gap data. The 10-year note edged up in price to 100-06/32 for a yield of 5.1%, while the 30-year bond rose to 90-13/32 for a yield of 5.13%.

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