Earnings Worries Hit Stocks

The Dow ends down 1%, while the Nasdaq sheds 1.6%.
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Updated from 4:06 p.m. EDT

Stocks dropped Monday amid concerns about second-half earnings, with tech shares getting hit especially hard. Treasuries also slumped, bumping yields to levels unseen in eight months.

After gaining 1.5% on Friday, the

Dow Jones Industrial Average

fell 91.46 points, or 1%, to 9096, while the

Nasdaq

fell 27.02 points, or 1.6%, to 1681.48, extending last week's 1.5% stumble. The

S&P 500

lost 14.52 points, or 1.5%, to 978.80.

Treasuries sank along with stocks, as traders reacted to speculation that the three-year mortgage boom may finally be winding down. Across the board, prices were down, with the yield on the 10-year note gaining 19 basis points to 4.20%. Less than a month ago, yields on the 10-year were at 40-year lows, dipping below 3.25%, but a huge selloff last week pushed yields back up above 4%.

While the tumble of stocks and bonds was disheartening for some, some market watchers took the moves in stride, calling the action in equities typical for an earnings period.

"Late Friday, we had the nice run-up into the close, so basically we're giving back the gains from Friday as people take a breather today," said Peter Coolidge, portfolio manager at Deltec Asset Management. "There's a whole spate of earnings coming this week, so the market has to digest these earnings."

This week, one-third of the S&P 500 will report results, with earnings for the companies expected to climb 6.9% in the second quarter, according to Thomson First Call. So far, two-thirds of the 158 companies that have reported results have surpassed analysts' estimates. Earnings are forecast to rise 13% and 21% in the third and fourth quarters this year, respectively.

But given the fact earnings have been solid thus far, the negative tone to the trading has raised concerns that the market rally has already factored in good news and that the second-half recovery story would prove to be false, as was the case over the last couple years.

"Certainly, some do think that maybe it's already baked into the cake, all the positive news that things are turning around and now we have to go past those expectations," said Coolidge. "There's a dilemma there. Will there be more fodder for bulls to chew on? Will this be once again a false start? Is this another mini-rally within a bear market? The tension is out there."

The economic news for Monday was somewhat mixed, with the Index of Leading Indicators gaining 0.1% in June, in line with analysts' expectations. This is the third straight month of gains for the index. Separately, the North American Semiconductor Equipment Industry's June's book-to-bill ratio came in at 0.93, beating the 0.92 expected by market watchers and up from 0.90 in May. Bookings were soft, however, coming in at $720 million, down from May's $724 million and way off from the year-ago $1.17 billion.

Tech stocks in the Philly chipmakers were off 2%, led lower by

Texas Instruments

(TXN) - Get Report

, which was down 81 cents, or 4.3%, to $17.88 ahead of its release of earnings after the bell.

Drugmaker

Merck

(MRK) - Get Report

said its profit rose to 83 cents a share in the second quarter, but missed analysts' average estimate of 84 cents. Sales were helped by core pharmaceutical products, including Zocor, the company said. Shares were down $1.95, or 3.2%, to $59.82.

3M

(MMM) - Get Report

beat Wall Street's forecasts for profit and revenue, with the help of cost cuts and currency gains. 3M also predicted earnings will be better than expected in the third quarter. Shares were up $6.17, or 4.7%, to $136.35.

Printer maker

Lexmark's

(LXK)

results fell short of analysts' second-quarter estimates, and the company lowered its third-quarter profit forecasts. Shares were down $14.10, or 19.2%, to $59.40.

Southwest Airlines

(LUV) - Get Report

shares were down a penny to $16.98, even though the company said second-quarter earnings topped analysts' estimates and third-quarter earnings would top year-ago levels.

Also in corporate news,

Apollo Group

(APOL)

took the spotlight after a

Wall Street Journal

report said the FBI has investigated allegations that the company's

University of Phoenix

(UOPX)

unit stole trade secrets from a testing-software company. Apollo Group was down $2.17, or 3.4%, to $61.98, while UOP was down $1.61, or 2.9%, to $53.69.

AOL Time Warner

(AOL)

is facing lawsuits from two of the largest U.S. pension funds -- the California Public Employees' Retirement System and the California State Teachers' Retirement System. Both allege that the media company overstated earnings and revenue to inflate its stock price. The funds want to recover a total of $450 million. AOL shares were down 39 cents, or 2.3%, to $16.35.

Video-game makers were also coming under fire after the

Securities and Exchange Commission

contacted

Activision

(ATVI) - Get Report

over accounting practices that are common in the industry.

THQ

(THQI)

and

Acclaim

(AKLM)

also revealed that the SEC had contacted them. Activision was off $1.17, or 9.4%, to $11.29, while THQ was down $1, or 5.7%, to $16.70, and Acclaim was down 2 cents, or 2.9%, to 66 cents.

Analysts were active Monday, with

Motorola

(MOT)

getting a downgrade from Credit Suisse First Boston. Shares of the company were down 33 cents, or 3.7%, to $8.72. Meanwhile,

Yahoo!

(YHOO)

was up $1.15, or 3.9%, to $31.05 after Smith Barney analysts upgraded the stock.

Business Objects

(BOBJ)

was up $2.88, or 14.2%, to $23.14, after the company was upgraded at Piper Jaffray.

Two corporations shuffled the management deck on Monday.

ImClone

(IMCL)

said Chief Scientific Officer Harlan Waksal had resigned. Meanwhile,

Genesis Microchip

(GNSS)

was down $2.10, or 14%, to $12.89 after the company said its chief executive had resigned and would be replaced by its finance chief on an interim basis.

Brent futures were lower in London, while the dollar was lower against the yen and euro.

European stocks slumped, with London's FTSE 100 closing down 0.7% at 4044 and Germany's Xetra DAX ending down 2.4% at 3287. In Asia, Japan's Nikkei closed 0.3% higher at 9527, while Hong Kong's Hang Seng lost 0.4% to 10,102.