Earnings Trip Up Stocks

Updated from 4:10 p.m. EDT

Stocks in the U.S. finished in the red Tuesday as traders dealt with poor earnings forecasts just days before a flood of quarterly reports is set to roll in.

The Dow Jones Industrial Average was off its low for the day but still surrendered 35.91 points, or 0.3%, to 12,576.52. The S&P 500 shed 7.01 points, or 0.5%, to 1365.53, and the Nasdaq Composite was down 16.07 points, or 0.7%, to 2348.76.

"All things considered, we're holding up pretty amazingly," said Charles Rotblut, senior market analyst with Zacks Investment Research. "I think a lot of people are trying to trade on the assumption that the bad news is already reflected in the market."

Breadth was poor for the day. Roughly 3.53 billion shares traded on the New York Stock Exchange with decliners topping advancers by a 3-to-2 margin. Volume reached some 1.66 billion on the Nasdaq as losers edged out winners 5-to-4.

Marc Pado, U.S. market strategist with Cantor Fitzgerald, pointed out that the major indices are near their February highs and have already attempted to get through those levels three times, and to no avail.

"We're getting right where there would be a major breakout from a three-month base, and we need a catalyst to do that," he said. "We can't just float through such a significant resistance level."

On the corporate front Tuesday, the first harbinger of bad tidings was Alcoa (AA Quote), which issued its first-quarter report last night in an event that's widely regarded as the symbolic start of earnings season.

The aluminum maker said income plummeted 54% due to ballooning energy costs and the weakening U.S. dollar. Excluding items, that was weaker than anticipated, though declining revenue still managed to top expectations. Shares closed down 0.7% at $37.18.

As for disappointing guidance, Advanced Micro Devices (AMD Quote) said first-quarter sales took a bigger-than-expected slide to roughly $1.5 billion, falling short of the $1.62 billion analyst consensus. The firm, which has been facing mounting competition from Intel (INTC Quote), also plans to fire 10% of its workforce. JMP Securities sliced its price target in half to $10. Shares sank 4.9% to $6.03.

Fellow tech name Novellus (NVLS Quote), a semiconductor-equipment maker, slashed its first-quarter earnings forecast to a range that's below Wall Street expectations. Shares were down 8.1%.

Still, said Pado, "I think the general feeling is, no one expects the first quarter to be any good. The focus isn't so much on the economic slowdown as, what do we do get past it?"

He cited an example in Washington Mutual (WM Quote), which said it will raise $7 billion by selling shares to TPG Capital and other investors -- $2 billion more than the amount yesterday's reports foretold. TPG alone will pick up $2 billion worth of new WaMu stock. The beleaguered bank said the move should keep its capital "well above" targeted levels over the next couple of years, though investors seemed concerned about the dilutive effects of the newly issued shares.

WaMu also projected a $1.1 billion loss for the first quarter and plans on chopping its quarterly dividend down to a penny a share from the prior payout of 15 cents. Keefe Bruyette cut the stock to market perform from underperform, and WaMu shares sank 10.2% in partial retreat from their massive rally Monday.

Also on Tuesday, student-loan firm First Marblehead (FMD Quote) tanked 36.9% after losing its financial backer, the Education Resources Institute, to bankruptcy. First Marblehead sells student loans as bonds, and TERI had been designated to cover any defaulted loans, so that risk exposure has now transferred back to the firm.

On the economic front, the Federal Reserve released the minutes from the March 18 gathering of the Federal Open Market Committee, when the fed funds rate was slashed by another 75 basis points to 2.25%. The minutes paint a picture of a broad-based downward economic spiral, indicating that some participants "believed that a prolonged and severe economic downturn could not be ruled out given the further restriction of credit availability and ongoing weakness in the housing market."