Updated from 4:08 p.m. EDTThe Dow and the Nasdaq plummeted to their lowest closing level in nearly a month Tuesday after investors interpreted testimony from Federal Reserve Chairman Alan Greenspan as a signal that the economy is one step closer to interest rate hikes. The Dow Jones Industrial Average dropped 123.35 points, or 1.18%, to 10,314.50 after being positive for most of the day. The S&P 500 lost 17.73 points, or 1.56%, to 1118.09, and the Nasdaq Composite was off 41.80 points, or 2.07%, to 1978.63. The 10-year Treasury note went from flat to trade down 15/32 in price, yielding 4.45%, while the dollar surged against the euro and the yen. The Dow's loss was moderated somewhat by the performance of General Motors ( GM), which rose 3.5% on better-than-expected first-quarter earnings. But 28 of the Dow's 30 components finished lower. Volume on the New York Stock Exchange exceeded 1.5 billion shares, while over 1.9 billion changed hands on the Nasdaq. Decliners dominated advancers by about 7 to 2 on both exchanges. While not directly addressing the near-term outlook for short-term interest rates in his prepared statement, Greenspan did signal that a period of rising interest rates was materializing by acknowledging that banks were preparing for a higher rate environment and that the risk of deflation had disappeared. He said that in the last few years, banks made up for weakness in the market for business loans and the underwriting of equity securities by offering consumers household credit in a low interest rate environment. As rates rise, some banks will "undoubtedly be hurt by rising rates," Greenspan said. "However, the industry appears to have been sufficiently mindful of interest rate cycles and not to have exposed itself to undue risk." "It's clear that the Fed is paving the way for rates to move higher sooner than anticipated," said Peter Cardillo, chief market analyst at S.W. Bach & Co. "He said deflation is no longer an issue. So, obviously, what is the issue now? The issue is strength in the economy and higher inflation, and that means higher interest rates." "I think the Fed is going to take a pre-emptive strike against higher inflation," Cardillo added. "And it's also sending a strong message that the economy is strong enough to stand on its own two feet and it doesn't need crutches anymore." On Wednesday at 10 a.m. EDT, Greenspan will address the Joint Economic Committee on Capitol Hill. Trip Jones, managing director at SunGard Institutional Brokerage, said that today's testimony from the Fed chairman was only a warm-up for tomorrow, when he will address the state of the economy. "People will definitely be on edge leading up to that speech," he said. Corporate news continued to deluge the market Tuesday, one of the biggest days for earnings this quarter, with three dozen S&P 500 companies scheduled. After the closing bell, Motorola ( MOT) posted a stronger-than-expected quarterly profit as the company said it expanded its share of the global handset market. The company said it earned $609 million, or 25 cents a share, compared with $169 million, or 7 cents a share, in the year-ago quarter. Its shares closed down 48 cents, or 2.9%, at $16.22, but had gained nearly 20% in after-hours trading.
Also, Applied Micro Circuits ( AMCC) beat expectations, narrowing its loss and more than doubling its fourth-quarter revenue. Its stock closed down 22 cents, or 4%, to $5.30, but it recently gained 4% in after-hours trading. Earlier Tuesday, shares of Sony ( SNE) closed up 68 cents, or 1.6%, to $42.23 after the electronics and entertainment giant raised its guidance for the fiscal year just ended. The company said it expects to earn $714.8 million on sales of $69.44 billion for the year, up about 60% from its January earnings forecast. It was helped by foreign exchange gains, lower taxes in the U.S. and increased profits by affiliates. Among early earnings reporters, Pfizer ( PFE) said first-quarter earnings fell from a gain-swollen year-ago period despite a big jump in sales. The drugmaker earned $2.33 billion, or 30 cents a share, in the latest quarter, compared with $4.67 billion, or 76 cents a share, last year. Pfizer earned 52 cents a share before items, beating estimates by a penny. Its shares closed down 88 cents, or 2.3%, to $36.70. General Motors posted weaker first-quarter results from a year ago but beat expectations, reporting earnings of $1.28 billion, or $2.25 a share, down from last year's $1.48 billion, or $2.71 a share. Analysts were expecting the company to earn $1.79 a share after a drop in the automaker's defense business. Its shares rose 4.5%, while its rival Ford ( F) gained 3.7% ahead of its announcement scheduled for Wednesday morning. Its shares closed up $1.62, or 3.5%, to $47.77. Altria's ( MO) earnings were flat with a year ago, thanks to a one-time charge, while revenue jumped almost 13% on solid results in both its domestic and international cigarette business. The company earned $2.19 billion, or $1.07 a share. The latest quarter included charges totaling 9 cents a share for the restructuring of Altria's food operations and other items. Revenue rose to $21.84 billion in the latest quarter from $19.37 billion last year. Its shares closed down 12 cents, or 0.2%, to $56.33. Wells Fargo ( WFC) said its profits rose 18%, helped by a jump in consumer lending and a decline in bad loans. Its net income beat Wall Street's consensus estimate of 98 cents a share, totaling $1.77 billion, or $1.03 a share, up from last year's $1.49 billion, or 88 cents a share. Its shares closed down 55 cents, or 1%, to $55.36. Lucent ( LU) swung to a second-quarter profit and matched Wall Street's consensus estimate, benefiting from extensive cost-cutting that more than offset a drop in revenue. It reported net income of $68 million, or 2 cents a share, compared with a loss of $351 million, or 14 cents a share, a year earlier. Its shares closed down 44 cents, or 10.2%, to $3.89. Overseas markets were mostly higher. London's FTSE closed up 0.5% to 4569 and Germany's Xetra DAX added 0.9% to 4061. In Asia, Japan's Nikkei closed up 1.6% to 11,952, while Hong Kong's Hang Seng fell 0.5% to 12,394. The stream of earnings news will continue Wednesday, with more than 70 companies scheduled to announce first-quarter results. Ford ( F) is expected to report profits of 44 cents a share, down from last year's 25 cents a share; Coca-Cola ( KO) is expected to report profits of 43 cents a share, up from last year's 47 cents a share; JP Morgan Chase ( JPM) is expected to say it earned 87 cents a share, up from 69 cents a share; and Honeywell ( HON) is expected to say it earned 30 cents a share, down from last year's 32 cents a share. On the economic front, the Fed will release its Beige Book, a report on economic conditions around the country.