Ebb and Flow Ends With Rising Tide

Traders warn that this week's moves are somewhat off-kilter due to quarter-end window dressing. So even while stocks ended on a high note, sentiment seemed glum.

The semiconductor sector was suffering Thursday at the prospect of weak profits. RF Micro Devices(RFMD Quote) and ATMI (ATMI Quote) gave weak first-quarter earnings guidance, sending the stocks down 10.8% and 6.8%, respectively.

The news dragged down many in the chips arena, as Broadcom(BRCM Quote), and Advanced Micro Devices(AMD Quote) fell 0.7% and 2.2%, respectively, while the Philadelphia Stock Exchange Semiconductor Index lose 0.9%.

Other firms issuing warnings or weak results included Nabors Industries (NBR Quote), which bucked the uptrend in energy names, and UTi Worldwide (UTIW Quote). Insurance stocks were also notably weak after UBS downgraded United Health (UNH Quote), which fell 3.5%.

Bond prices nudged lower, but yields remain essentially flat on the day and the curve somewhat steeper.

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Many strategists and economists harkened back to Federal Reserve Chairman Ben Bernanke's testimony Wednesday to the Joint Economic Committee to back up their own concerns about earnings. Bernanke highlighted high levels of resource utilization and rising labor costs putting pressure on companies' profit margins -- particularly if productivity does not keep pace or if consumption slows. In other words, if companies have to pay more but can't pass along those costs, their profit margins will shrink.

Northern Trust chief economist Paul Kasriel agrees that the Fed should take note of declining profits. While the Commerce Department revised fourth-quarter GDP up to 2.5% from 2.2% Thursday, it revised profits (before tax and adjusted for inventory valuation and capital consumption) to show a sequential decline through 2006, he notes.