Stocks Hammered by Profit Worries

Disappointing outlooks from Microsoft and GE -- plus some negative economic releases -- darkened investors' mood. Will next week's reports bring some relief?

Stocks finished with steep losses Friday as weaker 2003 guidance from Microsoft (MSFT ) and dreadful fourth-quarter earnings from General Electric (GE ) deepened investor gloom about the corporate profit picture. A number of worse-than-expected economic reports added to the sour tone, as did news that as the White House called the United Nations discovery in Iraq of 11 empty chemical-weapon warheads "troubling and serious."

The Dow Jones industrial average was down 111.13 points, or 1.28%, to 8586.74, while the broader Standard & Poor's 500-stock index lost 12.83 points, or 1.4%, to 901.77.

The tech-laden Nasdaq composite index was hit particularly hard by the Microsoft news, dropping 47.56 points, or 3.34%, to 1,376.19.

U.S. financial markets will be closed Monday in observance of the Martin Luther King, Jr., holiday.

The story of the day was Microsoft, which beat its fourth-quarter earnings estimates, declared its first-ever dividend, and announced a 2-for-1 stock split. But the positive factors in Microsoft's earnings report were overshadowed by its weaker sales guidance, creating concern that 2003 may be another sluggish year for corporate tech spending.

Also dragging stocks lower, GE had its biggest quarterly profit drop in 9 years on reinsurance costs. The industrial and finance giant's fourth-quarter profits fell 21% because of added reserves necessary for the company's reinsurance business. Sales at the largest maker of jet engines, turbines and medical-imaging equipment, rose 4.1% to $35.4 billion, the company said in a statement.

Meanwhile, Home Depot (HD ), reduced its annual profit forecast for a third straight year. Profit growth for the world's largest home-improvement chain will range from 9% to 14%, slower than the company's previous annual estimate for a gain of as much as 20%.

The market was hit by a series of discouraging economic reports. The U.S. merchandise trade deficit widened to $40.1 billion in November -- a new record -- from a revised $35.2 billion in October (from $35.1 billion previously). Meanwhile, U.S. industrial production unexpectedly fell in December and plant use fell to the lowest in nine months, the Federal Reserve reported. It was the second straight annual decline in production, the first time that has happened since 1974-75.

"U.S. industrial production was soft in December, but should soon start to strengthen based on the upturn in the ISM manufacturing new orders index and resilient consumption," the Bank Credit Analyst said in its daily market report.

But Friday's University of Michigan consumer sentiment update may cause the most discomfort on Wall Street. The index tumbled to 83.7 in January from a final reading of 86.7 in December. The current conditions component of the report rose slightly to 96.9 from 96.0, while expectations slid to 75.2 from 80.8. Flagging consumer demand could spell trouble for a U.S. economy already hamstrung by weak levels of corporate investment. "Consumers seem more concerned with jobs and Iraq than they are pleased with President Bush's proposed tax cuts," Economy.com analyst Scott Hoyt said in a report.

The bad news Friday followed fairly strong earnings numbers posted by bellwether tech companies Thursday. After the close of trading Thursday, IBM (IBM ), reported sales and profit figures that beat estimates.

And eBay (EBAY ) nearly doubled its revenues in the fourth quarter, with net income handily beating analysts' estimates. Ebay raised its earnings guidance for 2003. Ebay now has a market capitalization higher than both General Motors and Honeywell (HON ).

Analysts pointed out, however, that beating the year-ago performance wasn't difficult for many companies due to last year's weaker economy.

Bristol-Myers Squibb (BMY ) will match previously lowered profit expectations for 2003, the company said. But Bristol also confirmed that next month it will restate three years of prior earnings after an investigation, revealed last October, uncovered the company's practice of using discounts to encourage wholesalers to buy more drugs. Securities regulators are still looking into the deals.

Hospital stocks and health insurance companies were among the only bright spots in the market this week. They jumped on more positive sentiment about federal Medicare spending for hospital care.

Rumors of war were persistent this week, as continued Korean and Iraqi confrontations pushed the threat of war closer. And inflation remained "nonexistent," Standard & Poor's David Wyss said in a report. Producer prices were unchanged in December and consumer prices up a meager 0.1%.

In the consumer economy, retail sales rose only 1.2% in December, with a 5.0% rise in auto sales and flat non-auto sales, while the University of Michigan's consumer sentiment survey showed a 3-point drop to 83.7, as expectations fell sharply.

In economic news next week, housing starts will be reported Tuesday and are expected to rise only slightly to a 1.7 million starts on a rolling 12-mos. average. In December, poor weather contained growth in starts. Even with recent fluctuations, the housing sector remains strong due to low rates, Economy.com reports.

On Wednesday, the U.S. Treasury is expected to post a $5.0 billion surplus for December, much lower than the $26.6 billion surplus in December 2001 due to lower receipts and higher outlays.

On Thursday, weekly jobless claims are expected to rise 35,000 to 395,000 in the January 18 employment survey after falling in each of the previous two weeks. There were 438,000 claims in the December survey week, so the slide over the last month suggests better payrolls numbers for January.

Also Thursday, the index of leading economic indicators is expected to be unchanged in December as the negative impact of falling stock prices and higher jobless claims was offset by the positive impact of the longer manufacturing workweek, better vendor performance, and the continued rise in the money supply.

Fourth-quarter earnings season rolls on next week. Among the big names expected to release results: Motorola (MOT ), Citigroup (C ), and Johnson & Johnson (JNJ ) on Tuesday, Pfizer (PFE ), Texas Instruments (TXN ), and Qualcomm (QCOM ) on Wednesday.

Thursday brings releases from EMC (EMC ), BellSouth (BLS )and AT&T (T ), while Friday's lineup includes Lockheed Martin (LMT ) and American Electric Power (AEP ). Treasury Market

Treasuries finished off the week in fine form on Friday, benefitting from a bullish combination of disappointing corporate earnings, weapons finds in Iraq, and a soft patch of economic data. The bond market closed at 2 p.m. EST Friday, and will be closed for the Martin Luther King holiday on Monday.

World Markets

European stocks fell hard in Friday's session, led by Cap Gemini SA and Royal Philips Electronics NV, after Microsoft lowered its sales forecast, spurring concern about the profit outlook for computer-related companies.

London's FTSE index finished down 61.20 points, or 1.58%, to 3,820.60, while Paris' CAC-40 index tumbled 85.66 points, or 2.73%, to 3,056.93. In Frankfurt, the DAX index plummeted 135.29 points, or 4.43%, to 2,918.82.

In Asia, stocks finished mixed. Japan's Nikkei 225 Index closed up 81.08 points, or 0.94%, to finish at 8690.25, despite a government report saying that the nation's economy has "weakened" and may slow more as stocks slump and global growth slows, lowering its evaluation for a third month. Meanwhile, Hong Kong's benchmark Hang Seng sank 128.64 points, or 1.32%, to 9,614.59.