Earnings Rally Fizzles Out as Dow Posts Worst Week Since January

Equity investors had a chance to grab onto something other than Greece this week, and the result wasn’t pretty.

A nascent rally tied to earnings disappeared as blue-chip companies bore the brunt of selling that drove the Dow Jones Industrial Average down the most since January. Energy and raw-material stocks were driven lower by a global rout in commodities.

Stocks worldwide tumbled 2.1 percent, with the MSCI All-Country World Index posting its worst week of the year. The Dow dropped 517.92 points, or 2.9 percent, to 17,568.53. The Standard & Poor’s 500 Index slid 2.2 percent and the Nasdaq Composite Index fell 2.3 percent, the biggest declines for both gauges since March.

The week brought a change of pace for U.S. investors, who chased developments in debt negotiations in Greece and volatility in Chinese equities earlier this month. The focus has since switched toward corporate earnings and a commodity collapse spanning from gold to oil, which showed no signs of slowing down.

“We got past the Greece issue, so that’s off the front burner, and China’s still out there, but they’re off the front burner too,” said Mike Baele, managing director at Portland, Oregon-based at U.S. Bank Private Client Reserve. “The market has been focused front-and-center on earnings, and it’s been a mixed bag. Rather than an overall, macro stock market, it’s now more company by company.”

Dow Tumbles

Companies from Apple Inc. to International Business Machines Corp. and Microsoft Corp. disappointed investors. As a result, the advance in the 119-year-old Dow from July 8 to July 23 was less than half that in the S&P 500, the biggest deficit since the first quarter of 2009.

The global economy and a rising dollar, which are taking a disproportionate toll on mega-cap multinationals, were to blame for most of the Dow’s disappointments. The industrial gauge faces additional pressure because of its makeup, as the Dow weights constituents according to where shares of its member companies trade, not their market value.

Out of 185 S&P 500 companies that have reported earnings, about 77 percent beat profit expectations and about 53 percent exceeded revenue projections. More than two weeks into the reporting season, analysts expect profit for the broader-market index to decline 4 percent in the second quarter, according to a Bloomberg survey released July 24.

Commodity Prices

U.S. stocks were also caught up in the slide in commodities. The Bloomberg Commodity Index fell 4.4 percent in the five days, the most since 2011, to reach a 13-year low. The measure has tumbled about 28 percent over the past 12 months amid expanding gluts.

“People are worried about what it signals globally if commodity prices don’t stop falling,” said Jim Paulsen, the Minneapolis-based chief investment strategist at Wells Capital Management Inc. His firm oversees $351 billion. “If the rest of the world is strong, especially in the emerging world and China, you typically have stronger commodity prices. We’ve got a pretty big collapse going on here.”

The S&P 500 slumped 1.1 percent on the final day of the week amid fresh signs of a slowdown in the global economy as the Federal Reserve prepares to raise interest rates. Data Friday showed a private gauge of manufacturing fell to a 15-month low in China, the world’s top consumer of metals, grains and energy, while purchases of new U.S. homes unexpectedly retreated in June.

Copper Plunges

Raw-material companies in the S&P 500 led losses for the week, slipping 5.5 percent. Shares of Freeport-McMoRan Inc., the biggest publicly traded copper producer, posted their worst week since 2008 as the metal dropped to a six-year low in New York.

Energy stocks in the S&P 500 capped their worst week of the year as Exxon Mobil Corp. and Chevron Corp. dropped at least 2.7 percent. Chesapeake Energy Corp. plunged 24 percent. Brent oil completed the longest run of weekly declines since January.

In the coming week, 172 companies in the S&P 500 are slated to report quarterly results. Investors will also be watching for clues from the Fed’s two-day meeting, which will conclude with a policy decision on July 29. Fed Chair Janet Yellen told the Senate Banking Committee earlier this month that she expects to raise rates this year for the first time since 2006, with a gradual pace for subsequent increases.

Earnings, Fed

“Earnings will still be at play next week,” Paulsen said. “In addition to that, we have the Fed meeting, which probably shouldn’t have a lot of impact, but typically does on the margin. There’s a fair number of stuff next week that could keep it somewhat interesting.”

The Chicago Board Options Exchange Volatility Index rose 15 percent to 13.74 in the five days, jumping from its lowest level of the year. Declines in the S&P 500 were across the board, with all 10 industries falling at least 0.4 percent.

Apple fell 4 percent after the company’s iPhone sales and revenue forecast fell short of analyst expectations. IBM dropped 7.4 percent as sales declined across all of its major business units, marking the 13th straight period of falling revenue.

Microsoft lost 1.5 percent after the software maker posted its largest-ever quarterly net loss, hurt by a $7.5 billion writedown after the purchase of Nokia’s handset unit failed to rescue its mobile business.

Caterpillar Inc. dropped 8.5 percent, its worst week in more than three years. The company trimmed its annual revenue forecast after selling fewer of its signature yellow diggers and dump trucks to miners amid the deepening slump in prices for copper, coal and iron ore.

Amazon.com Inc. was a bright spot during the week, climbing 9.6 percent. The Web retailer reported a surprise second-quarter profit on top of sales that beat analysts’ estimates.

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