Stocks Jolted Back to Reality

The major indexes finished sharply lower after warnings from Palm and Nortel reaffirmed the grim outlook for tech earnings

Investors were slapped back to reality Wednesday, Mar. 28, as woes among technology companies, the former high-flyers of the stock market, shoved the major indexes sharply lower. The troubles began with the latest series of warnings and disappointing earnings reports. And this is just the beginning.

In the next couple of weeks companies will be talking about first quarter results and expectations for the second quarter. Though many tech companies are trying to hit already lowered targets for the first quarter, some could still fall short and outlooks for the second quarter are expected to be grim. "I think, by and large, expectations are not quite right for the second quarter. They're still too high," says Patrick Adams, president of Choice Funds in Denver, Colo.

"In general, things are bad in technology, but a lot of companies already pre-announced. Still, maybe we'll see some second-tier stocks come out with much worse than expected earnings," Adams adds.

Tuesday's higher-than-expected consumer confidence data boosted the major indexes for the third straight session. But on Wednesday warnings from high profile companies dashed the bear market rally in both Old Economy and Nasdaq stocks. The Dow, which was dragged lower by its tech components, ended off 162.19 points, or 1.63%, to 9,785.35. The Nasdaq, meanwhile, shed 118.34 points, or 6.00%, to 1,853.92. And the broader S&P 500 closed down 28.92 points, or 2.45%, to 1,153.25.

Telecom equipment maker Nortel Networks (NT ), which has already tumbled to new lows after previous warnings, said after the close Tuesday that it would no longer provide full-year forecasts. It warned that its first quarter results will fall be below previous expectations. "Now what's going to happen is all the companies in tech land are going to come out and say the same thing [as Nortel]- that they don't know when things will get better," said Brian Finnerty, head trader at CE Unterberg Towbin.

The ugly corporate news, "coupled with the strong market of the last three trading sessions, gave traders the ability and need to take some profits in this market," Adam Friedman, a senior portfolio manager on Armada Small Cap Value Fund/A (AMRRX ) told S&P's AdvisorInsight.

Handheld computer maker Palm Inc. (PALM ) posted earnings for the third quarter that beat analysts' expectations, but became the latest company to announce layoffs and other cost-cutting as a result of lower demand for its products.

Dow member Walt Disney Co. (DIS ) is weighing on the blue-chip index today on news that it plans to slash 4,000 jobs, or about 3%, from its global workforce by July as the slowing economy that has cut into advertising sales could spread to its tourism business.

Treasury Market

U.S. Treasuries finished mixed. Another meltdown in the tech stocks gave the short end of the Treasury curve a lift at the expense of the long bond. Indeed, the long bond failed to capitalize on the safe-haven flow and closed slightly lower on the session.

Stocks in the News

Beverage giant Coca-Cola (KO ) said it expects worldwide unit case volume to grow in the range of 4% to 5% during the first quarter.

ADC Telecom (ADCT ) further lowered its second quarter guidance to a pro forma loss of between $0.10 and $0.15 on sales of $650 million to $700 million. The maker of telecom equipment blamed the economy and the slowdown in capital spending by communication service providers.

Handspring (HAND ) said it sees continued sales growth in its business at this time. Meanwhile Credit Suisse First Boston trimmed its estimates and Merrill Lynch downgraded the stock to near term neutral from accumulate.

World Markets

European stocks closed lower as those markets followed a lower open in the U.S. In London, the Financial Times-Stock Exchange 100 index ended down 114.10 points, or 1.99%, to 5,614.00. In Germany, the DAX Index ended down 120.69 points, or 2.03%, to 5,817.52. In France, the CAC 40 finished off 85.17 points, or 1.63%, to 5,150.43.

In Asia, the markets finished higher. The Nikkei added 127.18 points, or 0.93%, to 13,765.51. In Hong Kong, the Hang Seng ended up 143.51 points, or 1.13%, to 12,851.41.

Today's Headlines

President Bush's vision for reining in government growth and providing $1.6 trillion in tax cuts over 10 years is set to move a step closer to reality today with the House expected to pass the plan on mostly partisan vote: Reuters.

California's power regulators approved the largest utility rate increases in state history in an effort to avert more rolling blackouts and keep the state's principal electricity producers from collapsing in bankruptcy: NYT.

The Macedonian army launched a fresh offensive to clear ethnic Albanian rebels from the hills along the northern border with Kosovo, but the rebels vowed to fight back: WSJ.

By Amy Tsao in New York

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