Dow Slumps on Earnings Warnings

The Dow industrials plunged 295 points Friday, closing out the fifth straight losing week for U.S. stocks as a fresh batch of profit warnings and analyst downgrades highlighted the shaky outlook for corporate earnings.

Shares of Philip Morris, Delta Air Lines and drug maker Wyeth were hammered after the companies warned of weaker-than-expected results in the third quarter or for all of 2002.

General Electric weighed on blue-chip indexes after brokerage analysts at Lehman Bros. and Credit Suisse First Boston cut their ratings on the conglomerate. On Thursday, GE cautioned that business at some of its units “seems to have stalled.”

“Everybody is waiting for signs of a pickup in corporate profits,” said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco. “Pricing power remains weak, stock valuations are still fairly rich, and the Mideast situation is adding to all the uncertainty among investors.”

The Dow fell 295.67 points, or 3.7%, to 7,701.45, nearly wiping out the big gains of Wednesday and Thursday.

Among broader indexes, the Standard & Poor’s 500 fell 27.58 points, or 3.2%, to 827.37, and the technology-heavy Nasdaq composite index lost 22.45 points, or 1.8%, to 1,199.16.

The sell-off left the Dow and the Nasdaq near their multiyear lows reached early in the week, and the S&P; 500 not far from its low reached July 23.

Losing stocks swamped winners by 5 to 2 on the New York Stock Exchange and by more than 2 to 1 on Nasdaq. Volume was moderate.

Treasury yields, meanwhile, resumed their descent as investors sought haven from the equity market at almost any price and some investors bet that the Federal Reserve will trim interest rates before year-end in another attempt to spark the economy.

The yield on the benchmark 10-year T-note fell to 3.66% from 3.77% on Thursday.

For the week, the Dow lost 3.6%, the S&P; 500 slid 2.1% and the Nasdaq slipped 1.8%. All three major indexes have lost ground each week since Aug. 23.

The latest economic reports offered a mixed picture of the U.S. economy. The University of Michigan’s final September consumer sentiment index slipped to 86.1 from 87.6, its lowest reading since November amid a soft job market and talk of war.

Still, the government raised an earlier reading of the pace of second-quarter economic growth. Gross domestic product, the broadest measure of the economy’s health, rose at an annual rate of 1.3% in the second quarter, the Commerce Department said, up from the 1.1% estimated a month earlier.

Schlossberg said that although recent economic data have been “neutral or slightly negative” on balance, profit warnings have been coming at a rapid clip during the quarter’s so-called confession season, and he said Wall Street analysts have been steadily lowering their earnings forecasts, just as they did late in the second quarter.

Overall, S&P; 500 profit is expected to rise 7.5% in the third quarter from a year earlier, he said, citing data from Thomson First Call, but at the start of this quarter analysts surveyed were looking for better than 16% growth.

Chris Orndorff, head of equities at Los Angeles-based money manager Payden & Rygel, said investors may be more pessimistic than warranted by the economic picture these days.

“There’s a sense of panic out there,” Orndorff said. “Investors have reversed the mantra of the 1990s, which used to be ‘Buy on the dips.’ Now it’s ‘Sell on the rallies,’ so the advance we saw on Wednesday and Thursday had people thinking, ‘It’s time to sell.’ ”

The Dow rallied 314 points in two days before Friday’s sell-off.

Aside from the economic uncertainty, the market is in the throes of its worst season, historically. September has been the weakest month for stocks, on average, and true to form, the S&P; 500 is off 9.7% this month. While not as dismal on average, October has seen several scary sell-offs, including the 1987 crash.

For the third quarter, the S&P; 500’s 16.4% drop would be the index’s largest since a 23% plunge during the fourth quarter of 1987, according to Bloomberg News data. Monday is the quarter’s last trading day.

In Friday’s trading, GE sank $1.92 to $24.47. Among other blue chips, Gillette and insurer Chubb also slumped in the wake of downgrades or cautious new ratings from Wall Street analysts.

Gillette lost 95 cents to $30.01 and Chubb slipped $5.07 to $53.91.

In the wake of their warnings, Philip Morris fell $4.87 to $37.86, Delta lost $2.81 to $8.69 and Wyeth dropped $7.35 to $31.10.

In foreign trading, Brazil’s Bovespa index plummeted 5.3%, reaching a three-year low. Indexes were mixed in Europe and moderately higher in Asia.

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Reuters was used in compiling this report.

Market Roundup, C4-5