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Big firms report dismal earnings for third quarter
Dow takes another dive
Stock markets around the world suffered through one of the worst days of trading in months Tuesday, as a number of U.S. companies reported weak earnings because of a slowdown in the global economy and as concerns mounted over Spain's role in the European financial crisis.
The Dow Jones industrial average suffered its biggest drop since June for the second time in less than a week with the index falling 243.36 points, or 1.82 percent, to close at 13,102.53. Those losses followed Friday's session, when the Dow tumbled 205 points to close at 13,343.51.
These are the worst two days of trading for the Dow since June 21, when it lost 249.53 points, though the market had gained about 1,000 points overall in the four months since then.
However, a series of poor corporate earnings reports from such major companies as DuPont, Xerox, 3M and United Technologies have stoked fears of a weakening global economy, something to which such worldwide firms would be sensitive.
Tim Courtney, chief investment officer at Exencial Wealth Advisors in Oklahoma City, didn't think it was just soft results driving the market's plunge Tuesday. Analysts already were expecting lower revenue, so the weak results aren't a total surprise.
The financial results, Mr. Courtney said, are just a symptom of a bigger problem, a sputtering economy threatened by the shadow of the "fiscal cliff" — a combination of tax increases and government spending cuts scheduled to take effect Jan. 1 that could send the U.S. back into recession.
"They're using [earnings] as an excuse, but it's the broader issues that are driving it," he said. "What's going to happen with the election, what's going to happen with the fiscal cliff? Europe is already in recession — are we going to go, too? That fear is driving a lot of the selling right now."
Bad news from Spain also hurt the markets. Several regions in Spain received a credit downgrade, which further worried investors. Spain's central bank also announced the country's economy contracted in the third quarter by 0.4 percent, the fifth quarter in a row of negative growth.
Also Tuesday, the Nasdaq fell 26.50 points, or 0.88 percent, to close at 2,990.46, while the Standard & Poor's 500 index declined 20.71 points, or 1.44 percent, to close at 1,413.11.
DuPont, a chemical company, closed at $45.25, down $4.51, or 9 percent, after its earnings report disappointed investors with a profit that was lower than expected and the decision to cut 1,500 jobs that led to concern about how the company is handling the economic slowdown.
The company badly missed analysts' estimates on earnings. It was expected to announce a profit of 47 cents per share but instead announced a profit of 32 cents per share. Revenue fell 9 percent to $7.4 billion, from $8.1 billion a year ago.
DuPont's poor performance accounted for at least a 33-point drop on the Dow.
"Clearly, U.S. companies are feeling the pain as a result of the global slowdown," Bernard Baumohl, managing director and chief global economist at the Economic Outlook Group, told Reuters.
The drop could endanger a key talking point of the Obama campaign about the strong rise of the stock markets since he became president. Conservative market analysts said Tuesday that the recent rise had been a mere bubble creation anyway.
Derek Scissors, an economist at the Heritage Foundation, blamed the drop-off on the money that the Federal Reserve injected into the economy over the past month, which he says artificially inflated the markets.
"To me, the markets are overvalued," he said. "This is just about money flashing around. A bunch of money gets dumped into the system, it's got to go somewhere, so we get stock market run-ups, which makes it vulnerable to sharp drops like this. But money can flow out of the market just as easily."
Since the end of the Great Recession, investors have rewarded companies for increasing profit, even if revenue growth has been unimpressive. And companies have turned in three years of growing profit. But companies can squeeze profit many ways, including cost-cutting, and revenue offers a truer read on customer demand. That is on investors' minds as the world economy lumbers along.
Even the profit streak may be over. Financial analysts predicted that profit would fall at S&P 500 companies for July through September compared with the year before, which would end a three-year streak.
Some of the disappointing revenue is because of weakness in foreign markets. Multinational companies are having a hard time selling to Europe, which has been hobbled by recession, and in emerging markets such as China and India, where growth is slowing. Businesses that had relied on growth there to offset weak U.S. consumer demand are being forced to come up with new strategies.
"The recession in Europe is very real," said Bernard Schoenfeld, senior investment strategist for Bank of New York Mellon Wealth Management. "It's not going to disappear very quickly, and it will certainly negatively affect earnings of exporters in the United States."
United Technologies Corp., meanwhile, also dragged the markets down, even after a good third quarter, because it cut its sales forecast for the year. The stock fell 76 cents, or nearly 1 percent, to close at $77.07.
The Hartford, Conn.-based company reported Tuesday that third-quarter profit rose 6.9 percent — in large part because of its acquisition of Goodrich Corp. for $16.5 billion, which boosted sales. The company earned $1.42 billion, or $1.56 a share, compared with $1.32 billion in the same period last year. Revenue also was up 5.7 percent to $15 billion, but fell short of analysts' estimates by nearly half a billion dollars.
But the stock fell as investors expressed concerns that the company cut its sales forecast for the year to $58 billion from $59 billion. The earnings forecast remains the same at $5.25 to $5.35 a share.
Facebook, the often-maligned stock, was one of the few bright spots for markets Tuesday, rising more than 13 percent to $22.13 in after-hours trading. The social networking giant beat Wall Street's expectations for revenue and earnings, the first good news from the Palo Alto, Calif.-based company since it went public in May.
Facebook reported non-GAAP earnings of 12 cents a share, which beat estimates of 11 cents a share. It also reported a non-GAAP net income of $311 million.
The company also reported revenue of $1.26 billion, up from $954 million a year ago, which beat estimates of $1.23. billion.
Facebook credited the success to its growth in mobile advertising.
"People underestimate how good mobile is for Facebook," CEO Mark Zuckerberg said on the earnings call. "People on mobile use Facebook more often. We'll monetize better on mobile than on desktop."
But that news, reported after the markets closed, came too late to prevent Wall Street's downturn Tuesday.
Global markets also disappointed Tuesday, with stock markets across Europe losing significant ground, according to both benchmark indexes and general trading measurements.
The FTSEurofirst 300 index experienced its worst day in months, falling 1.7 percent to its lowest point since Sept. 5, while the benchmark Euro STOXX 50 blue-chip index closed down 2.1 percent.
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About the Author
Tim Devaney is a national reporter who covers business and international trade for The Washington Times. Previously, he worked for the Detroit News, Grand Rapids Press, Portland Press Herald and Bangor Daily News. Tim can be reached at firstname.lastname@example.org.
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