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Wall Street Poised for Next Blow as Bad News Mounts

Analysis: As resilient as the market has been throughout its decade-long run, many pros say, it can withstand only so much.


What else can go wrong?

That question was being muttered up and down Wall Street on Thursday as an already deeply troubled stock market got blindsided by more bad news.

The surprise profit warning from once-dependable growth company Home Depot Inc. intensified fears about a weakening economy, while escalating tensions in the Middle East raised the specter of a Gulf War-like bear market.

Taken together, they added to surging concerns that domestic and global woes are far more serious than investors had imagined.

Many market bulls cling to the notion that stocks' latest decline, which began the first week of September, is nearing an end. They say that a host of factors--including the frenzied dumping of many shares at any price this week--suggest that the selling is reaching a peak.

"It strikes me as it can't get much worse," said Richard Eakle, head of investment firm Eakle Associates in Fair Haven, N.J.

Even so, many pros also are thinking about other shoes that may yet drop on the bull market, or what's left of it.

The key concern, of course, is that as resilient as the market has been throughout its decade-long run, it can withstand only so many blows.

In recent months, energy prices have risen much more sharply than many experts predicted, the euro currency has fallen much more steeply than expected, and major technology companies have warned of sales and earnings weakness that few analysts anticipated.

Beyond the most obvious catalyst for a deeper market plunge--the outbreak of widespread conflict in the Middle East--here are some of the potential threats Wall Street is most concerned about now:

* Corporate earnings growth weakens even more than expected, and more companies warn of additional trouble. Since early September, 416 companies have issued earnings "pre-announcements," and 67% of those have been warnings of weaker-than-expected results, according to First Call/Thomson Financial.

That's up sharply from the 58%-negative ratio in the second quarter.

What concerns investors now is that the warnings haven't yet stopped--as Home Depot demonstrated Thursday. More important, if more companies begin to guide analysts lower in their estimates of fourth-quarter and 2001 results, it could magnify concerns about an economic slowdown here and in Europe and trigger a new wave of selling, pros say.

With many companies' stocks still historically high relative to underlying earnings, investors won't be willing to suffer any suggestions that earnings growth will decelerate further, analysts say.

Still, many pros also caution against undue pessimism about earnings. Indeed, on Thursday some technology companies had good news to report. Fiber-optics giant Corning Inc. said its third-quarter results will top expectations. The stock gained $2.88 to $86. Networking firm Juniper Networks reported quarterly results that exceeded estimates. Its shares rose to $207 in after-hours trading after falling $6.39 to $199.61 in regular trading.

* Debt problems surge among consumers and businesses. Experts have long worried that many consumers and companies have taken on excessive debt during the long economic boom.

In an economic slowdown, more individuals and companies may have trouble making their debt payments. At the corporate level, an unexpected debt-repayment surprise at a large company could spur a fresh wave of selling in stocks of highly leveraged companies, some say.

This week, junk-bond yields have surged on such credit fears. Brokerage Morgan Stanley Dean Witter on Wednesday had to stifle rumors that it had suffered huge losses in junk-bond trading.

But on Thursday, investors again hammered shares of many financial companies, a reflection of the concerns over possible bond and loan losses in a weaker economy. Morgan Stanley slid $7 to $70.75, Citigroup dropped $2.75 to $46.75 and Bank of America lost $2.50 to $44.56.

* The dollar plummets as foreign investors bail out of U.S. securities. U.S. stock and bond markets have been driven in recent years in part by heavy buying by European and Japanese investors. Indeed, along with the massive U.S. trade deficit, that foreign investment shows our reliance on foreign capital.

"Perhaps the worst thing we can see--and we haven't seen it yet--is foreigners losing faith" in U.S. securities, said Bill Meehan, chief market analyst at institutional brokerage Cantor Fitzgerald & Co.

A plunging dollar could force the Federal Reserve to raise interest rates to defend the currency.

So far, many market bulls are clinging to the opposite idea: that the Fed will, at some point, be moved to cut interest rates to support the market and keep the economy from slowing too sharply.

"The [Middle East] crisis and spike in oil [prices] may force the Fed to backpedal and lower interest rates," Eakle said.

However, that assessment is far from universal.

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