U.S. Stocks Drop After 5-Day Rally on Earnings Forecasts

U.S. stocks declined, with the Standard & Poor’s 500 Index falling from a record, as valuations reached an almost four-year high and forecasts at companies from Caterpillar (CAT) Inc. to Broadcom Corp. disappointed investors.

Caterpillar dropped 6.1 percent after reducing its 2013 revenue and profit forecast as slumping metal demand decreases orders from mining companies. Broadcom, a maker of chips that connect mobile devices to the Internet, slipped 2.9 percent. Boeing Co. (BA) climbed 5.3 percent to a record after boosting its full-year earnings estimate. Corning Inc. jumped 14 percent after approving a $2 billion buyback and agreeing to purchase full ownership of a Samsung Electronics Co. joint venture.

The S&P 500 fell 0.5 percent to 1,746.38 at 4 p.m. in New York, snapping a five-day, 3.3 percent rally. The Dow Jones Industrial Average lost 54.33 points, or 0.4 percent, to 15,413.33. About 6.6 billion shares changed hands on U.S. exchanges, 12 percent higher than the three-month average.

“The market has run quite a bit,” Edward Painvin, chief investment officer of Chase Investment Counsel Corp., said by phone from Charlottesville, Virginia. His firm oversees $500 million. “Every time you have that kind of move going into earnings season, expectations are high. The market is going to be placing an increasing amount of emphasis on companies delivering expectations and providing some clarity for 2014.”

The S&P 500 advanced 23.03 percent this year through yesterday, pulling within a percentage point of its 23.5 percent surge in 2009, amid speculation the Federal Reserve will delay cuts to its monthly bond purchases until the labor market improves. The benchmark index rose 0.6 percent yesterday to a record as data showed fewer-than-forecast additions to payrolls in September.

Equity Valuations

The S&P 500 (SPX) was valued at 15.9 times estimated earnings yesterday, the highest since December 2009, data compiled by Bloomberg show. While that’s up 16 percent this year, it’s still below the multiples at the market’s two previous peaks, when the ratio reached 16.5 in October 2007 and 25.7 in March 2000.

About 87 percent of stocks in the S&P 500 traded above their average prices from the past 50 days, the most since May 21, data compiled by Bloomberg showed.

The benchmark index and all its 10 main industries traded more than two standard deviations above their respective 50-day moving average, according to data compiled by Bespoke Investment Group LLC. The simultaneous strength in momentum has occurred on only two other days since 1990, a study by the Harrison, New York-based research firm showed.

Former Federal Reserve Chairman Alan Greenspan said stock market momentum is heading upward.

‘Ultimately Up’

“In a sense, we are actually at relatively low stock prices,” Greenspan, who guided the central bank for more than 18 years, said in an interview with Sara Eisen on Bloomberg Television today. “Indeed I say that so-called equity premiums are still at a very high level, and that means that the momentum of the market is still ultimately up.”

AT&T Inc. and 38 other companies in the S&P 500 report were scheduled to report results today. Profits for members of the gauge probably increased 2.5 percent during the third quarter as sales climbed 2.2 percent, according to analysts’ estimates compiled by Bloomberg.

Of the 169 S&P 500 companies that have reported results this season, 76 percent exceeded analysts’ predictions for profit, while 54 percent beat sales estimates, according to data compiled by Bloomberg.

Volatility Gauge

The Chicago Board Options Exchange Volatility Index (VIX), the gauge of S&P 500 options known as the VIX, rose 0.7 percent to 13.42 today, trimming its decline for the month to 19 percent.

Seven out of 10 main industries in the S&P 500 declined, with commodity, consumer-discretionary and financial companies dropping at least 0.6 percent to lead the retreat.

Caterpillar, the world’s biggest maker of construction and mining equipment, slumped 6.1 percent to $83.76 for the steepest decline since September 2011. The company’s sales and profit are projected to decline for the first time since 2009. Slower demand for commodities in emerging markets has pushed miners to cut capital spending, including purchases of equipment.

Commodity shares slid with gold and copper prices as China’s money-market rates jumped the most since July, spurring concern surging borrowing costs may erode demand in the country, the world’s biggest user of industrial metals.

Cliffs Natural Resources Inc., the largest U.S. iron-ore producer, slid 2.9 percent to $23.42 while Newmont Mining Corp., the second-largest gold miner, lost 4.1 percent to $27.29.

Broadcom, Altera

Broadcom slipped 2.9 percent to $26.36 after it forecast fourth-quarter revenue of about $1.92 billion to $2.03 billion. Analysts on average had predicted $2.13 billion. The company said it’s cutting as many as 1,150 jobs as demand slows for chips that connect mobile phones to the Internet.

Altera Corp. tumbled 13 percent to $32.30. The maker of programmable semiconductors forecast fourth-quarter sales of $450.4 million at most. That trailed the average analyst estimate of $474.8 million in a Bloomberg survey.

Juniper (JNPR) Networks Inc. dropped 6.4 percent to $19.05. The world’s second-biggest maker of networking equipment revenue for the current quarter that may miss analyst estimates and is cutting 3 percent of its workforce, indicating that demand for telecommunications equipment remains inconsistent even though mobile-Internet traffic is surging.

Cree Inc. (CREE) tumbled 17 percent to $61.77 as the maker of energy-efficient lighting products reported earnings that missed estimates.

Boeing, Corning

Boeing, the world’s largest planemaker, climbed 5.3 percent to $129.02, an all-time high. Revenue and free cash flow are surging as Boeing speeds the production tempo for single-aisle 737s, wide-body 777s and 787 Dreamliners to take advantage of airlines’ demand for more fuel-efficient jets. Boeing raised the 787’s planned output rate to 12 a month in 2016, up from a goal of 10 by the end of 2013.

Corning, the maker of glass for televisions and mobile devices, surged 14 percent to $17.52 for the biggest increase in the S&P 500. The company said it will buy Samsung’s 43 percent stake in Samsung Corning Precision Materials Co., which makes glass for liquid crystal displays in South Korea.

Apollo Group Inc. surged 28 percent, its strongest gain ever, to $26.80. The biggest U.S. for-profit college chain posted fourth-quarter profit, excluding some items, of 55 cents a share. That surpassed the 25 cent average of analyst forecasts compiled by Bloomberg.

Norfolk Southern Corp. climbed 6.8 percent to a record $86.06. The second-largest U.S. eastern railroad posted a third-quarter profit that topped analysts’ estimates because of rising shipments of steel, fracking sand and farm products.

Homebuilders Gain

An S&P index of homebuilders advanced 1.3 percent with all of its 11 members rising, as 10-year Treasury yields fell to a three-month low. The group has tumbled 21 percent from this year’s peak in May amid concern rising borrowing costs will temper demand in housing market.

PulteGroup Inc. climbed 0.9 percent today to $16.68 while Lennar Corp. added 1.1 percent to $36.55.

“The economy is just in a slow growth mode and we don’t see any deviation from that slow, healing trend,” Jerry Braakman, chief investment officer of First American Trust in Santa Ana, California, said in a phone interview. His firm oversees about $1 billion. “That slow growth continuing just keeps the Fed taper at bay. We think that’s positive for equities.”

To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net; Aubrey Pringle in New York at apringle1@bloomberg.net

To contact the editor responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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