Thursday, August 12, 2010

Stocks Slip on Bad Earnings

Technology companies led the stock market to its third straight loss Thursday after Cisco Systems' (CSCO) earnings report raised more questions about the economy.  The Dow Jones is down 80 points in afternoon trading.  The NASDAQ composite index had a steeper loss in percentage terms, a reflection of the drop in tech stocks.  Analysts said many traders were on vacation, and the market's resulting light volume helped skew price changes. 

Cisco Systems Inc.'s revenue from its latest quarter and its forecast for future revenue both fell short of analysts' expectations.  The company's stock fell almost 10% and other tech stocks also fell.  Investors have been focused on revenue since companies began reporting second-quarter earnings almost a month ago.  They're concerned by the connection between revenue and the economy -- if revenue is down, it's a sign that consumers' reluctance to spend is starting to affect companies' sales and profits. Investors see the revenue shortfalls as another sign of a weakening recovery.

Sara Lee Corp.'s (SLE) revenue also missed analysts' forecasts. And retailer Kohl's (KSS) disappointed the market by lowering its earnings outlook because it expects sales to slow during the second half.  That period includes the holiday season, when retailers hope to make a large part of their profits.

Stocks extended their losses from Wednesday, when the Dow fell 265 points as investors reacted to the Federal Reserve's lowering of its assessment of the recovery on Tuesday. Economic data from several countries including the U.S. contributed to the heavy selling.  Investors don't have a sense of whether the recovery will hold. The uncertainty has led to big losses, but many traders are staying out of the market and not making any moves. That has made trading volume even lighter than usual during July and August, when vacations leave trading desks thinly staffed.

Charlie Smith, chief investment officer with Fort Pitt Capital Group in Pittsburgh, predicted few major market moves for the rest of the month because so many key market players are away.  Smith said the market's drop over the past few months was due more to investors' more negative outlook rather than a fundamental change in the economy.  "We had a weak recovery back in March and April," Smith said. At that point, the market was moving toward its post-financial crisis high. Stocks began falling after the major indexes peaked in late April.


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