Stocks declined Monday, even if inflation jitters were temporarily set aside as the bond market -- and hawkish Federal Reserve officials -- took a holiday. Investors weren't able to overcome bad corporate news and a lack of sector leadership as energy shares continued to drop, even as crude oil rose.

The Dow Jones Industrial Average fell 53.55 points, or 0.52%, to 10,238.76, a hair above its intraday low of 10,237 and way off its morning high of 10,323. The S&P 500 dropped 8.57 points, or 0.72%, to 1187.33, also near its low for the day at 1186. The Nasdaq Composite fell 11.43, or 0.55%, to 2078.92, just shy of its intraday low of 2078.11.

Low trading volumes partly exaggerated the moves, as 1.6 billion shares traded on the Big Board and only 1.4 billion traded on the Nasdaq. Breadth was negative, with more than two issues declining for every one gaining on the Big Board and 19 losers for every 10 gainers on the Nasdaq.

More bad news from the battered automotive sector came over the weekend as Delphi Automotive ( DPH) filed for bankruptcy, a move that may hit General Motors ( GM) to the tune of $10 billion. Delphi shares plummeted 70% on over 35 times its normal daily trading volume while GM tumbled 9.9%. Also, auto parts supplier Dana ( DCN) fell 34% after saying it would restate its earnings.

There were also two high-profile tech profit warnings: Xilinx ( XLNX) lost 16% after its red flag while Unisys ( UIS) declined 12%. Xilinx's warning helped drag the Philadelphia Semiconductor Sector Index down 3.2%.

And while the price of crude oil rebounded from recent weakness, adding 41 cents to $62.25 per barrel, the energy sector remained under pressure. On Monday, the Amex Oil Index fell another 1.1% after losing 7.4% last week. Sunoco ( SUN), Valero ( VLO) and Exxon Mobil ( XOM) led the downside.

Still, the heavy selling pressure seen last week -- when the Dow lost 2.6%, the S&P dropped 2.7% and the Nasdaq fell 2.8% -- subsided, at least for one session.

True, there was no economic data to fuel concerns over how soaring energy costs, inflation and a hawkish Fed could break the back of the economy next year; furthermore, the bond market was closed in observance of Columbus Day. But the respite may prove short-lived, as the Fed will release the minutes of its September meeting on Tuesday, and consumer inflation and retail sales data are slated for release on Friday.

Expectations Meet Confusion

Perhaps also explaining the lack of momentum evident in Monday's market action is that even after the negativity seen last week, the market still has high expectations -- perhaps too high -- for the third quarter and especially for next year's earnings.

Ten of the 32 companies that issued a negative preannouncement last week cited Hurricane Katrina or Hurricane Rita as one reason for the revision. Alcoa ( AA), which kicked off the reporting season after the close, had already warned. (Alcoa shares were recently up in after-hours trading after its results exceeded the lowered estimates.)

The impact of hurricanes Katrina and Rita has been hard to compute -- many firms' operations were shut down or disrupted, while input prices soared for many others. For that reason profit-warning season has been extended through October.

There was evidence of this Monday, as Northrop Grumman ( NOC) blamed the hurricanes for a profit shortfall for 2005. Shares of the defense contractor fell 1%.

Analyst expectations of S&P 500 companies' third-quarter earnings have been falling slightly since last week, according to Thomson Financial. Earnings are on average expected to grow 16.4% from last year's quarter. That's down from 17.8% expected at the end of last week, mostly due to downward estimate revisions to insurance and energy companies' earnings.

The energy sector is expected to post average earnings growth of 71% for the third quarter, according to Thomson, with Exxon Mobil, Chevron ( CVX) and ConocoPhilips ( COP) contributing the most to this growth. Without the energy sector, overall earnings growth would be just 10% for the quarter.

To a large degree, market strategists believe that because of the confusion resulting from the hurricanes, it's mostly the earnings outlook that will matter when firms report this quarter's profits.

But even there, investors may be overly optimistic. "Expectations for the fourth quarter and for 2006 are too high, particularly if our forecast of slowing economic growth proves correct," according to Bob Doll, an investment strategist at Merrill Lynch.

Doll says the combination of rising short-term rates, rising energy prices and a cooling in the housing market all point toward a slowing economy next year.

Perhaps this explains the hesitations of equity investors who are now facing two conflicting outlooks for the economy and monetary policy next year, neither particularly encouraging for stocks. If the economy doesn't slow very much, the Fed will keep on lifting short-term rates. If the economy does slow enough to make the Fed stop tightening, the profit outlook for next year will be too optimistic, Doll says.

Yet Doll, like many other strategists, still believe a tradeable rally is possible in the short term, especially as some of the above risks were already discounted in last week's sharp decline.

Ironically, while even the price of crude oil approaching $60 per barrel is apparently failing to ease investors concerns over high energy costs, it might be another quarter of stellar earnings growth that revives the energy sector and the market.

To view Gregg Greenberg's video take on today's market, click here .

In keeping with TSC's editorial policy, Godt doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. He appreciates your feedback; click here to send him an email.

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