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Dow falls 234 points as corporate earnings disappoint investors

Wall Street is unsettled by glum earnings guidance from several companies warning of downbeat prospects for the rest of the year and early 2013.

October 24, 2012|By Walter Hamilton and Andrew Tangel, Los Angeles Times
  • A trader works on the floor of the New York Stock Exchange as the Dow Jones industrial average plummeted more than 200 points.
A trader works on the floor of the New York Stock Exchange as the Dow Jones… (Justin Lane, EPA )

The second punishing sell-off in three days is casting doubt on the stock market's prospects for a late-year rally.

A batch of dispiriting quarterly earnings reports, coupled with downbeat projections from companies about their near-term outlooks, drove the Dow Jones industrial average down more than 243 points Tuesday.

It was the blue-chip indicator's biggest loss in four months, and followed on the heels of a 205-point retreat Friday.

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Investors had long expected companies to report unimpressive third-quarter earnings as they grapple with economic softness in Europe and Asia. But Wall Street has been unsettled by glum guidance from several companies that warned about downbeat prospects for the rest of this year and the beginning of 2013.

"While analysts were expecting CEOs to be cautious, they didn't expect them to be as cautious as they are," said Fred Dickson, chief market strategist at D.A. Davidson & Co.

The bleak tenor raised concern that stocks may not be able to muster a late-year surge after the presidential election, as many people on Wall Street had hoped.

"The poor earnings season accompanied by weak guidance has dampened expectations for a year-end rally," said Dan Greenhaus, chief global strategist at investment firm BTIG in New York. Companies are "not providing anything resembling an encouraging outlook."

Shares of DuPont Co. skidded 9% after the chemical maker reported worse-than-projected third-quarter earnings and uncorked a particularly downbeat profit outlook. DuPont also announced plans to slash 1,500 jobs, in part because of soft global demand.

DuPont isn't alone in shedding jobs because of weakness abroad. After the market closed, Dow Chemical Co. announced plans to eliminate about 2,400 jobs, about 5% of its global workforce, and close 20 plants.

The Dow ended down 243.36 points, or 1.8%, at 13,102.53. The blue-chip indicator is off 3.7% from its recent peak on Oct. 5.

The Standard & Poor's 500 index declined 20.71 points, or 1.4%, to 1,413.11. The Nasdaq composite index had a lesser decline of 26.5 points, or 0.9%, but that was enough to push it under 3,000.

Analysts had expected the market to take a breather after a rally that carried the Dow up 12.5% in four months. The question is whether the incipient slide will turn from a mild downturn into something worse.

Some experts think the sell-off will be mild.

"The correction in the market doesn't seem to be more than your mid-single-digit-type correction," said Liz Ann Sonders, chief investment strategist at Charles Schwab Corp. "It doesn't appear to have the characteristics of something more sinister."

Still, while analysts had expected a poor earnings showing in the third quarter, some major companies have performed worse than forecast.

Aside from DuPont, United Technologies Corp. disappointed the market. 3M Co. met earnings estimates but missed on revenue and, like the other companies, offered a dim outlook for growth.

The average company in the S&P 500 is on track to post earnings growth of just 0.06% in the third quarter, based on reported earnings and analysts' expectations, said Christine Short, senior manager at S&P Capital IQ in New York.

That's the lowest since the third quarter of 2009, and underscores how the economy's onetime bright spot — corporate earnings — has dimmed.

"We're expecting this quarter to really be a turning point. Company growth is slowing," Short said. "No longer are the days of double-digit earnings growth that companies were able to reach."

"We've had these low expectations for weeks now," she added. "Finally, it's hitting investors."

Investors are troubled that several companies, even if they have satisfied profit estimates, have fallen short of revenue expectations. That demonstrates their inability to gain traction in a tepid global economy and suggests that companies are meeting their numbers more by cutting costs than by improving sales.

Only 38% of S&P companies have beaten revenue estimates for the third quarter, the lowest in at least 10 years, Short said. On average, 61% of companies beat revenue estimates.

"The problem appears to be that revenue numbers are much weaker than what analysts expected," Dickson said.

One company that reported better-than-forecast revenue was Facebook Inc.

The social networking giant reported after the market closed that it was making progress generating advertising revenue from mobile devices, a crucial area for the company. Facebook shares rose to about $22 in after-hours trading, up about 13% from their $19.50 close.

walter.hamilton@latimes.com

andrew.tangel@latimes.com

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