Trader Joseph Lawler works on the floor of the New York Stock Exchange. (Richard Drew, AP )
The specter of anemic corporate earnings has put a temporary halt to the stock market's summer winning streak.
The Dow Jones industrial average fell for a third consecutive day Wednesday as investors faced the prospect that quarterly profits may decline for the first time since 2009.
The Dow slipped nearly 129 points, its second straight triple-digit setback, after Alcoa Inc. warned that weakened growth in China has cut into demand for aluminum. That renewed concerns that economic troubles in Asia and Europe could slice into profits of U.S. companies this year and next.
"The markets are continuing to recalibrate their earnings estimates and turning a closer eye to the prospects for 2014," said Alan Gayle, chief investment officer at RidgeWorth Capital Management.
"We've had decelerating economic growth [and] a number of risks that could impact growth and corporate profits," Gayle said.
Though the timing is a coincidence, this week's decline coincides with the five-year anniversary of the October 2007 market peak, which soon after launched a brutal bear market. It underscores lingering financial and emotional pain for investors.
From its high on Oct. 9, 2007, the Standard & Poor's 500 index descended into a bone-jarring 57% collapse over the next 17 months as the global financial crisis struck. The index has rebounded solidly since then, gaining 112% from its March 2009 low.
But it's clear from the persistent selling of equity mutual funds in the last few years that many individual investors have missed the opportunity to recoup their losses.
"Some investors either bailed out in the worst part of the downturn or failed to stick it out through the subsequent 31/2-year recovery," said Bruce Simon, chief investment officer at City National Bank. "There's still a tremendous amount of fear and frustration [stemming from] 2008 and 2009 that's created a semi-permanent change in attitude among equity investors."
Improbable as it seemed five years ago, the stock market has largely shrugged off the mirthless U.S. economy and litany of other worries to climb within striking distance of its former peak.
Even with this week's declines, the S&P is within 8.5% of its previous high. The Dow is within 6%.
"This has been the worst of times and also the best of times," veteran market strategist Hugh Johnson said. "We had a financial crisis, which only comes along every 50 years, and that was the worst of times. And then we had a strong bull market, which is the best of times."
A key concern now is corporate profit growth.
Earnings of firms in the Standard & Poor's 500 index are expected to decline 2.8% in the third quarter, the first such drop since the third quarter of 2009, according to Thomson Reuters.
Analysts predict profit growth will return with a 9.6% gain in the final three months of the year. But analysts have been scaling back their fourth-quarter forecasts lately as the global outlook has grown cloudier.
For months, Wall Street has been bracing for a slide in profits. But investors are nonetheless unsettled that stocks are being deprived of a key source of power.
Alcoa shares, for example, backtracked almost 5% on Wednesday on heavy trading volume even though the company topped earnings estimates.
That follows the move Monday by the International Monetary Fund to further reduce its projections for global growth. It now foresees a 3.3% improvement this year and 3.6% in 2013, although it warned that slower growth is a strong possibility.
"The earnings are a sign that the ability of the markets and the economy to withstand further shocks is not as great as it was last year or the year before," said Gary Flam, equity portfolio manager at Bel Air Investment Advisors in L.A. "You have weakening economies around the globe."
The Dow fell 128.56 points, or 1%, to 13,344.97. It has fallen 2% this week. The S&P 500 also is off 2%.
Given that the S&P 500 had advanced nearly 15% in the last four months, many professionals are content to reduce their stock exposure to preserve solid 2013 gains.
They want to see the outcome of various unknowns -- including the presidential election and the looming "fiscal cliff" of potential tax hikes and budget cuts -- before recommitting to stocks.
Sentiment is split among money managers, with some convinced that stocks will quickly resume their ascent and others deeply worried that share prices could backslide if the global economy sags further.
"We're still not out of this yet," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. "There's more uncertainty now than I've ever seen, and I've been here 35 years."