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Updated from 2:04 p.m. EDT

An ugly preannouncement season got worse Monday, dragging the


to multiyear lows, as investors began to fear another quarter's worth of earnings estimates would prove far too rosy.

Joining a parade of companies that began warning of weak results last week were

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(WMT) - Get Walmart Inc. Report


Sprint PCS


, each of which had discouraging estimates Monday about some area of their respective businesses.

The warnings follow dour outlooks from


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Electronic Data Systems


and others last week.

The breadth of the warnings has forced Wall Street strategists, already wary about corporate profitability, to slash their earnings estimates. On Monday, Morgan Stanley lowered its 2002 and 2003

S&P 500

earnings forecast, acknowledging the impact of a weak economic recovery.

"The air pocket hit by the market and the economy in early summer has resulted in worse-than-expected results in several industry groups, notably technology hardware and diversified financials," said Steven Galbraith, domestic equity strategist at Morgan Stanley, in a research note.

The brokerage cut its earnings predictions to $47.50 from $50 for 2002 and to $55 from $58 for 2003. Those levels give the index an implied price-to-earnings ratio of 18, using 2002 estimates, and 15, based on 2003. The bank also lowered its 12-month price target for the S&P to the 1050 range from an earlier forecast of 1200.

"I think you are going see more reductions in estimates," said Chuck Hill, director of research at Thomson Financial. So far, negative preannouncements in the third quarter have outweighed positive preannouncements by a 2 to 1 margin. Such a high ratio is particularly ominous after it fell in recent quarters, suggesting estimates are once again getting increasingly out of whack.

Analysts are now expecting 8.4% earnings growth in the third quarter, a forecast that has come down drastically over the last few weeks. As recently as last Monday, experts were calling for 10% profit growth, and in early July, they were forecasting 16.6% growth. By the end of the September, earnings tracker Thomson Financial expects analysts' growth predictions will have fallen to 6%.

Among Monday's culprits, Wal-Mart warned of disappointing same-store sales. The announcement raises concern about one sector of the economy that investors had been counting on, consumer spending.

"The Wal-Mart comments are bad," said Hill. "They raise the caution flag on whether or not the consumer will hang in there. Going forward, guidance on consumer spending is going to be key."

Sprint's news was mixed, with the phone giant saying its long-distance service was actually doing better than expected due to customer wins from some of its troubled rivals. But the company's

Sprint PCS


wireless operation was 10% lower after it said it was forced to curtail service to more customers than it had expected because of late payments.

Among other worrisome areas are financials; Morgan Stanley restored an underweight rating on the group Monday. Galbraith noted financials have already outperformed the S&P 500 this year and argued they have likely seen the benefit of a steep yield curve and accommodative

Federal Reserve


Overall, the S&P 500 may still have further to fall before it hits trough valuations. Since 1926, the index has traded on average at 12 times forward earnings, according to Kent Engelke, a strategist at Anderson & Strudwick, who notes that it usually recovers for real when priced at 7 or 8 times earnings.

"I think we have seen the preponderance of the drop," said Engelke. "But valuations need to be obscenely cheap before the beginning of another bull market. They do not take off at 15 times earnings."