Updated from 4:06 p.m. ESTThe Dow ended with a triple-digit loss Tuesday and the Nasdaq closed sharply lower as a warning from AOL Time Warner ( AOL) and bearish comments from a market analyst at Merrill Lynch gave investors a reason to bail out after recent gains. The Dow Jones Industrial Average finished down 119 points, or 1.35%, to 8742 while the Nasdaq was down 35 points, or 2.41%, to 1449 and the S&P 500 was off by 13 points, or 1.47%, to 920. Almost every sector was in the red Tuesday, with chips down 5%, networking issues down 4%, cyclicals lower by 2% and retailers off by 1%. Airline stocks were also weaker after a number of companies reported disappointing load factors in November. "Early on, Merrill Lynch changed its asset allocation and we had a downgrade on Merck so with the rally that we've had, it's not surprising to see the market react," noted Barry Berman, head of Nasdaq trading at Robert Baird & Co. Dow component Merck ( MRK) was downgraded by Merrill Lynch earlier in the day after the firm hastily scheduled a conference call just five days before an analyst meeting. But when the company reiterated earnings guidance for 2002 and said it still expects its core pharmaceutical business to show double-digit earnings growth in 2003, Merrill upgraded shares to "neutral" from "sell." The stock still ended down 2% to $58.82, however. Donald Straszheim, president of Straszheim Global Advisors, said stocks have "far outrun the economic fundamentals," but he believes the rally seen over the last eight weeks will continue with only periodic setbacks. Earnings comparisons will get easier in the next few quarters and corporate governance issues have now been resolved, he said. Media conglomerate AOL Time Warner was among the worst performers Tuesday, falling 14% to $14.21 after saying "solid" growth in worldwide subscription revenue at the AOL unit would be offset by declines in advertising and commerce revenue of 40% to 50% in 2003, "largely due to lower revenue recognition from prior-period commitments." That will result in unchanged overall revenue at the unit in 2003 compared with 2002. The company said a decline in high-margin advertising and commerce revenue will cause a 15% to 25% decline in earnings before interest, taxes, depreciation and amortization, year-over-year. Merrill Lynch also threw some cold water on the recent stock-market rally, lowering the allocation to equities in its model portfolio to 45% from 50% and raising its exposure to bonds to 35% from 30%. "The equity market still appears highly speculative to us," said chief strategist Rich Bernstein in a research note. "Such speculation is typically indicative of the end of a market cycle, and not of the beginning of a major bull market." Bernstein said corporate earnings remain highly volatile and are of a lower quality, and he noted that investors are largely ignoring geopolitical concerns or are pricing in a positive outcome. Shares of Nokia ( NOK) dropped 4% to $19.22 after reiterating that the global industry for mobile handsets would grow by 10% or slightly more in 2003. The firm also said the industry for wireless infrastructure equipment remains "challenging ... as operators focus on cash flow while cutting back on investments." On Monday, Merrill Lynch upgraded Nokia to a "buy," sending shares up 5%. In the chip sector, Texas Instruments ( TXN) fell even though the firm said it now expects a 3-cent profit excluding items, a penny more than analysts had estimated. TI said it now expects overall revenue to be down about 7% sequentially, instead of the 10% slide it had predicted in October. Shares were down 4% to $18.95. Lucent ( LU) was another loser, down 4.7% to $1.80 after revealing a proposal for a reverse stock split. Shares of Cisco Systems ( CSCO) skidded 3% to $14.52 after CEO John Chambers refused to offer any guidance for the current quarter. In the auto sector, Ford ( F) slid 13% after saying U.S. vehicle sales fell 16.6% in November from the same month last year. The firm still expects to meet fourth-quarter earnings estimates, however. General Motors ( GM) fell 5% after saying vehicle sales fell 18.2% in November. Bank stocks were mostly lower after the SEC said it would fine brokerage houses Morgan Stanley ( MWD), Deutsche Bank ( DB), Goldman Sachs ( GS), Citigroup's ( C)Smith Barney and US Bancorp Piper Jaffray a total of $8.25 million for failing to preserve e-mails. Still, Siebel Systems ( SEBL)rose 1% after the firm's CEO said that companies appear to be spending at a healthier rate in the fourth quarter. Meanwhile, Veritas gained 3.7% after reaffirming its fourth quarter sales forecast. Declines outpaced advances by 19 to 12 on the NYSE and by more than 2-to-1 on the Nasdaq. Volume reached 1.4 billion shares on the Big Board while 1.6 billion shares changed hands on the on the Nasdaq. On the economic front, outplacement firm Challenger Gray & Christmas reported that the pace of layoffs fell 11% in November to 157,508. Still, that is the third highest level this year. The planned cuts were deepest in high-sector sectors like computers and telecommunications, the firm said. Meanwhile, the Bank of Tokyo-Mitsubishi and UBS Warburg reported that chain store sales rose 0.3% in the week ending Nov. 30. Instinet Research's weekly Redbook gauge said sales rose 0.5%. Separately, the Office of Federal Housing Enterprise Oversight reported that home prices rose at a significantly slower pace in the third quarter than in the previous period, sparking concerns that the housing market may be starting to falter.