U.S. Stocks Drop on Europe as Crisis Threatens Earnings

June 25 (Bloomberg) -- Jim O'Neill, Goldman Sachs Asset Management chairman, talks about the European debt crisis, central bank monetary policy, and the economies of the U.S. and so-called BRIC nations. O'Neill speaks with Tom Keene, Ken Prewitt and Sara Eisen on Bloomberg Television's "Surveillance." (Source: Bloomberg)

U.S. stocks tumbled on concern this week’s European Union summit will fail to tame a crisis which put American earnings on pace for the first decline since 2009.

Technology, financial and energy shares dropped the most among 10 groups in the Standard & Poor’s 500 Index. Bank of America Corp. (BAC) and Chesapeake Energy Corp. (CHK) slumped at least 4.2 percent. Microsoft Corp. (MSFT) sank 2.7 percent after agreeing to acquire Yammer Inc. for $1.2 billion in cash. Constellation Brands Inc. surged 13 percent as it may benefit from a potential deal between Grupo Modelo SAB and Anheuser-Busch InBev NV.

The S&P 500 slid 1.6 percent to 1,313.72 at 4 p.m. New York time as 470 of its 500 stocks declined. The Dow Jones Industrial Average fell 138.12 points, or 1.1 percent, to 12,502.66. Volume for exchange-listed stocks in the U.S. was about 5.9 billion shares, or 13 percent below the three-month average.

“There are reasons for investors to be concerned,” Stephen Wood, the New York-based chief market strategist for Russell Investments, said in a telephone interview. His firm oversees $140.8 billion. “In addition to the ongoing wounds of Europe, we’ll begin to see softness in corporate earnings.”

Equities slumped as Chancellor Angela Merkel hardened her resistance to euro-area debt sharing, setting Germany on a collision course with its allies at a summit on June 28. Cyprus said it will seek a financial lifeline from the euro area’s firewall funds. Greek Prime Minister Antonis Samaras consented to the resignation of his finance minister, Vassilios Rapanos.

Billionaire investor George Soros warned that a failure by leaders meeting this week to produce drastic measures could spell the demise of the currency.

‘Be Fatal’

“There is a disagreement on the fiscal side,” Soros, 81, said in an interview with Bloomberg Television’s Francine Lacqua at his home in London. “Unless that is resolved in the next three days, then I am afraid the summit could turn out to be a fiasco. That could actually be fatal.”

Europe’s debt crisis is putting pressure on corporate results. Analysts predict members of the S&P 500 will report a 1.1 percent average drop in second-quarter earnings, after estimating a gain as recently as last month, according to data compiled by Bloomberg. That would follow a 6.2 percent average increase in the first quarter.

Earnings pessimism reached levels last seen during the financial crisis. Fifty-nine corporations issued profit projections that trailed analyst estimates during the 20 days through June 22, or 3.1 times the number of those that exceeded them. The ratio has been greater than 3 for eight straight days, the longest stretch in three years. It was at least that high the majority of the time between October 2008 and April 2009, climbing to 11.5 in December 2008, the data show.

‘Very Unlikely’

“There is a lot of trepidation about second-quarter earnings,” Tim Ghriskey, chief investment officer of Solaris Group in Bedford Hills, New York, said in a June 22 interview. He oversees about $2 billion. “You are very unlikely to see companies coming out with favorable outlooks given the problems in Europe and the slowing growth in the U.S. and China.”

Alcoa Inc., traditionally the first company in the Dow to report quarterly earnings, is scheduled to release its second- quarter figures on July 9.

All 10 groups in the S&P 500 fell as technology, financial and energy shares dropped at least 1.8 percent. The Morgan Stanley Cyclical Index of companies most-tied to the economy slumped 2.6 percent even as data showed demand for new homes rose more than forecast. Bank of America slid 4.3 percent to $7.60. Chesapeake Energy retreated 8.5 percent to $17.03.

Microsoft’s Deal

Microsoft dropped 2.7 percent to $29.87. San Francisco- based Yammer provides features -- similar to those found on Facebook (FB) Inc. -- to more than 200,000 companies such as Ford Motor Co. and EBay Inc. It will become part of Microsoft’s Office division and the team will continue to report to current Yammer Chief Executive Officer David Sacks.

Facebook, the biggest social-networking operator, decreased 3 percent to $32.06. The decline followed a 22 percent advance over the previous two weeks.

Pfizer Inc. (PFE) fell 1.1 percent to $22.47, while Bristol-Myers Squibb Co. (BMY) sank 3.5 percent to $34.13. The companies failed to gain approval of the blood thinner Eliquis from U.S. regulators, who said they needed more data on the treatment.

Sprint Nextel Corp. (S) slipped 6.1 percent to $3.09. The third-biggest U.S. wireless carrier declined amid concern over the management of its fourth-generation network expansion.

GeoEye Inc. (GEOY) tumbled 22 percent, the biggest decline since 2004, to $14.24. The provider of satellite imagery said a federal agency may scale back a $3.8 billion contract.

Largest Winemaker

Constellation (STZ) surged 13 percent to $21.86. The world’s largest winemaker gained the most in almost a decade as Anheuser-Busch InBev seeks to acquire the rest of Corona maker Grupo Modelo in a deal that a person familiar with the talks said could bring a payment to Constellation.

Quest Software Inc. (QSFT) jumped 5.6 percent to $27.70. The software maker that agreed to be bought by a group led by Insight Venture Partners said it has received a higher offer of $27.50 a share in cash.

Newmont Mining Corp., the largest U.S. gold producer, advanced 1.7 percent to $48.79. Gold futures gained the most in three weeks as Europe’s debt concern spurred demand for the metal as a hedge.

Fertilizer producers rallied after Dahlman Rose & Co. raised its recommendation for the industry. CF Industries Holdings Inc. (CF) increased 3.4 percent to $183.66. Mosaic Co. (MOS) gained 1 percent to $51.10.

Bountiful Oil

At a time of record fuel demand, bountiful oil and natural gas, and expanding economies, no stocks are doing worse in the world than energy producers from BP Plc to Hess Corp.

The MSCI World Energy Index (MXWO) has declined 9.6 percent this year through last week, more than any other group, according to data compiled by Bloomberg. The gauge has climbed 45 percent since equities bottomed in 2009, less than any industry with earnings tied to economic growth. In the U.S., the stocks are at the cheapest levels relative to the S&P 500 since 2009.

The divergence reflects the transformation of an industry where growing consumption of energy has been met with even bigger gains in supply. U.S. crude inventories are the highest since 1990 and natural gas prices have lost 38 percent in 12 months amid a glut spurred by hydraulic fracturing. Bears say energy producers, making up about 10 percent of global stocks, will keep equities from advancing. Bulls say the market will rally when their shares rebound.

“The S&P 500 will have a tough time making meaningful progress until the energy sector bottoms and begins to move higher,” Jim Russell, the Cincinnati-based chief equity strategist at U.S. Bank Wealth Management, which oversees about $116 billion, said in a phone interview on June 20. “Even though the valuations of the stocks are cheap, the fundamentals have not yet bottomed.”

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

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

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