U.S. Stocks Drop as Ireland Credit Rating Cut Smothers Rally

A late rally in U.S. stocks faded, dragging the Standard & Poor’s 500 Index to a third straight loss, after Ireland’s downgrade to junk added to concern Europe is losing control of the credit crisis and overshadowed evidence the Federal Reserve hasn’t ruled out more stimulus.

Semiconductor-related shares slumped, with Intel Corp. falling 1.8 percent after Novellus Systems Inc. (NVLS) forecast lower- than-estimated third-quarter earnings. Alcoa Inc. (AA) slipped 1.3 percent after second-quarter profit missed analyst estimates. Cisco Systems Inc. (CSCO) jumped 1.1 percent after two people familiar with the matter said it would announce job cuts.

The S&P 500 dropped 0.4 percent to 1,313.64 at 4 p.m. in New York, after the index fluctuated between gains and losses throughout the day. The Dow Jones Industrial Average lost 58.88 points, or 0.5 percent, to 12,446.88.

“There’s not a whole lot of conviction in the market,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $80 billion in assets. “Most investors are following Europe, and they are waiting to see if the earnings season will be good enough for them to get excited about equity prices. If that doesn’t happen, then you can add corporate performance to the ugly mix.”

The benchmark index for U.S. equities gave up 2.5 percent during the previous two sessions, the most for the S&P 500 since March, as concern grew that Europe’s debt crisis will spread and American lawmakers failed to agree on cutting the deficit. The gauge had climbed 5.9 percent over the previous two weeks, its biggest gain since October 2009. The rebound in July came after the S&P 500 tumbled 3.2 percent in May and June amid disappointing economic data.

Fed Minutes

The S&P 500 rallied as much as 0.6 percent today following the 2 p.m. release of minutes from the Federal Open Market Committee’s June meeting. The Fed report said policymakers continued to debate whether additional stimulus will be needed if the outlook for economic growth remains weak. Some members noted that the committee might need to consider further stimulus, while others voiced concern about an increased inflation risk that might warrant tighter monetary policy.

“The market rallied on the news that the Fed is certainly not ruling out further stimulus to further inflate the economy,” said Burt White, who helps oversee $330 billion as chief investment officer at LPL Financial Corp. in Boston. “We think it’s probably more hope than reality,” he said. “The backdrop is still difficult with the mess in Europe and a bumpy start to the earnings season with Alcoa.”

Rally Fizzles

The rally fizzled late in the day as Ireland’s credit rating was cut to non-investment grade by Moody’s, joining Portugal and Greece to become the third euro-area country to be lowered to junk.

Equities had recovered from losses of as much as 1.8 percent before the market opened on signs of progress in Europe. Luxembourg Finance Minister Luc Frieden said selective default on Greek debt is not an option envisioned by euro-region finance ministers, while European Union Economic and Monetary Affairs Commissioner Olli Rehn said officials reached agreement that investors should play a role in a second bailout of Greece. EU President Herman Van Rompuy said he didn’t rule out calling an emergency summit on Greece, although no decision has been taken.

“We’re in a very volatile period for markets and investors are almost paralyzed because they don’t know where the safe haven is,” said George Feiger, chief executive offer of Contango Capital Advisors Inc., a San Francisco-based wealth management firm with about $3.5 billion in assets. “It’s caused by a conjunction of factors, including the risk that Europe and the U.S. can’t deal with their debt issues effectively.”

Moving Average

The S&P 500 is trading near the level of 1,316 that represents the convergence of the index’s mean price over the last 50 and 100 days, data compiled by Bloomberg show. Moving averages are cited by analysts who use price charts as points where buying may pick up or selling snowball as investors reconsider past decisions. The gauge’s 200-day level is 1,274, based on intraday swings.

Alcoa, the largest U.S. aluminum producer, swung between gains and losses after second-quarter profit excluding certain items of 32 cents a share missed the 33-cent average estimate of 14 analysts surveyed by Bloomberg. The stock lost 1.3 percent to $15.71 after rising as much as 1.2 percent.

Earnings Season

Alcoa unofficially started the earnings season in the U.S. after exchanges closed yesterday. Others reporting this week include JPMorgan Chase & Co. (JPM), Citigroup Inc. (C) and Google Inc. S&P 500 profits are forecast to have grown 13 percent in the quarter, the smallest increase in two years, according to data compiled by Bloomberg.

Utility companies and health-care stocks gained the most among 10 S&P 500 groups today, climbing 0.5 percent and 0.1 percent, respectively, while industrials performed the worst, dropping 1 percent.

Novellus tumbled 11 percent to $31.75. Chairman and Chief Executive Officer Rick Hill said yesterday that profit before certain costs in the current period will be 60 cents to 75 cents a share for the maker of machinery used in semiconductor production. That compares with the average analyst estimate of 84 cents, based on a Bloomberg survey. Sales will be $300 million to $340 million, Hill said on a conference call, while analysts had predicted $360.7 million.

Chipmakers are showing a more cautious tone in orders from San Jose, California-based Novellus, and may hold off purchases until 2012, Hill said.

Intel, Microchip Technology

Semiconductor companies fell the most among 24 groups in the S&P 500, losing 2.8 percent. Intel, the world’s largest chipmaker, decreased 1.8 percent to $22.45. Microchip Technology Inc. (MCHP) tumbled 12 percent to $32.93 for the biggest retreat in the S&P 500. The maker of analog chips said sales and earnings for the quarter ended in June missed its forecasts.

Cisco, the largest networking-equipment company, rallied 1.1 percent to $15.60 for the biggest gain in the Dow. The company may cut as many as 10,000 jobs, or about 14 percent of its workforce, to revive profit growth, according to two people familiar with the plans.

Motorola Solutions Inc. dropped 1.5 percent to $43.50. Morgan Stanley (MS) cut the maker of bar-code scanners, walkie- talkies and other emergency-communication equipment to “equalweight” from “overweight.”

Radiant Systems Inc. (RADS) surged 30 percent to $27.99. The maker of software for retailers was acquired by NCR Corp. (NCR) for $28 a share.

To contact the reporters on this story: Nikolaj Gammeltoft in New York at ngammeltoft@bloomberg.net; Victoria Stilwell in New York at vstilwell@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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