Tech Stocks Take a Plunge

Cisco's outlook contributes to take the Nasdaq lower. The Dow and the S&P also fall back.
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Updated from 4:17 p.m. EST

Stocks closed lower Wednesday, with tech stocks posting deep losses, as

Cisco's

(CSCO) - Get Report

disappointing sales guidance late Tuesday contributed to prolonging the

Nasdaq's

recent underperformance.

The

Dow

fell 34.44 points, or 0.3%, to 10,470.74; the Nasdaq lost 52.07 points, or 2.5%, to 2014.14 -- its largest decline since plunging nearly 60 points in September -- and the

S&P 500

declined 9.51 points, or 0.8%, to 1126.52.

Volume on the

New York Stock Exchange

was 1.62 billion shares, while 2.23 billion shares exchanged hands on the Nasdaq. Decliners outpaced advancers by about 7 to 3 on the NYSE and by about 7 to 2 on the Nasdaq.

Robert Basel, co-head of equity trading at Citigroup Global Markets, attributed today's tech declines to disappointment over Cisco's earnings and not widespread profit-taking. Instead, he feels profit-taking began early last week and today's downturn was the result of diminished expectations for future earnings growth.

In economic news Wednesday, the Institute for Supply Management's January report on the service sector came in at 65.7; economists had expected a reading of 60, compared with the prior month's reading of 58. Also, the government said December factory orders rose 1.1%. Analysts had expected an increase of 0.2% from a 1.4% decline in the prior month.

Other Markets

Markets overseas finished mostly lower. In London, the FTSE 100 rose 0.2% to 4399, and in Germany, the Xetra DAX fell 0.7% to 4028. In Asia, Hong Kong's Hang Seng ended unchanged at 13,086.7, and Japan's Nikkei closed 1.8% lower at 10,447.3.

The 10-year Treasury note was recently down 7/32, yielding 4.12%. The dollar was still near a three-year low vs. the Japanese yen, lately fetching 105.48 yen. The dollar was slightly stronger against the euro, with the European single currency worth about $1.253.

Tech Troubles

The tech-laden Nasdaq was tagged for heavy losses Wednesday, after Cisco's earnings figures failed to satisfy investor appetites. The Dow, on the other hand, managed to avoid such a sharp decline, continuing a trend that began early last week. Investors are selling technology stocks in favor of cyclical and stable shares that are more prevalent in the Dow.

Since hitting its peak for the year on Jan. 26, the Nasdaq has lagged the Dow severely, plunging more than 7%, while the blue-chip index has fallen only 2%. Both indices remain in positive territory for year, however.

"This doesn't surprise me," said Hugh Johnson, chief investment officer at First Albany. "But the trend has not lasted long enough to have confidence it will last."

Johnson offered several reasons why such a rotation should be expected, given current market conditions.

"In the second-year of a bull market, historically, tech stocks do not outperform the broader market by as much," Johnson said. Also, "the market shifts from rewarding investors for small-cap to large-cap investments."

As is often the case, timing is the most difficult question, Johnson added. "I expect to have a clearer picture of whether this rotation will continue in about four weeks."

Movers

After the market closed Tuesday, Cisco reported better-than-expected earnings, but said it sees only a 1% to 3% sequential rise in sales in the third quarter. Shares of the company dropped on fears that tech spending has not improved as much as previously thought.

The company reported second-quarter earnings of $1.29 billion, or 18 cents a share, before a charge, which was a penny ahead of the consensus estimate. Cisco fell $2.33, or 8.8%, to $24.08 in Wednesday trading.

Oracle

(ORCL) - Get Report

boosted its bid for

PeopleSoft

(PSFT)

to $26 a share, or to about $9.4 billion. The tender offer is an 18.8% premium to the closing price of PeopleSoft shares Tuesday, and it will expire at midnight on March 12. Oracle shares fell 64 cents, or 4.6%, to $13.27, and PeopleSoft gained 81 cents, or 3.7%, to $22.70.

Ciena

(CIEN) - Get Report

shares fell $1.30, or 17.8%, to $6.99, after the company gave first-quarter revenue guidance of $66.4 million, $9 million below the consensus estimate. The networking company

blamed the shortfall on an order delay, but Wall Street wasn't taking it lightly.

Also in earnings,

Northrop Grumman

(NOC) - Get Report

narrowly beat analyst expectations, earning $1.11 a share in its quarter, a penny ahead of expectations. The company's profit slipped from $1.73 a year earlier, despite a 46.9% surge in revenue. The stock gained $1.10, or 1.1%, to $99.10.

Polo Ralph Lauren

(RL) - Get Report

said its fiscal second-quarter profit held steady at 47 cents a share, matching the consensus estimate. The shares shed 22 cents, or 0.7%, to $30.05.

Tommy Hilfiger

(TOM)

said its quarterly earnings fell to 28 cents a share from 38 cents a year ago, on a 5.6% decline in sales. Nevertheless, the apparel manufacturer easily beat forecasts by 15 cents. Tommy stock improved $1.57, or 12.3%, to $14.30.

Harrah's

(HET)

said Wednesday that it earned 50 cents a share in the fourth quarter, excluding items, compared with analysts' projections for 53 cents a share. Revenue was up 3.6%. The shares plunged $3.80, or 7.1%, to $50.

PepsiAmericas

(PAS)

had fourth-quarter earnings of 23 cents a share, excluding items, beating analysts' consensus for 19 cents a share. Total sales were up 8%. The stock improved 12 cents, or 0.7%, to $17.34.

And

Oxford Health

(OHP)

said it had a profit of $1.14 a share in the fourth quarter, on a 6% increase in sales. Analysts had been expecting $1.07 a share. The company's stock fell 21 cents, or 0.5%, to $46.82.

In research, UBS initiated coverage of

Sun Microsystems

(SUNW) - Get Report

with a neutral rating and Merrill Lynch reinstated coverage of

Yahoo!

(YHOO)

with a neutral rating. Sun stock fell 36 cents, or 6.6%, to $5.12, while Yahoo! slipped 54 cents, or 1.2%, to $44.95.

On Thursday, earnings highlights include

Alcatel

(ALA)

and

PepsiCo

(PEP) - Get Report

, both due before the opening bell.

In economics, initial jobless claims and productivity growth will be released at 8:30 a.m. EST; both reports could have implications for Friday's crucial January labor report. Claims for the week ended Jan. 30 are expected to fall by 2,000 to 340,000, making it 18 consecutive weeks under the key 400,000 level, which is thought necessary for job market improvement.

Productivity growth is expected to decelerate to 3% in the fourth quarter from 9.4% previously. Economists blame strong productivity gains for the economy's inability to add jobs despite robust growth.