Stocks drop on earnings reports

Reaching Dow 14,000 seemed easy. Dow 15,000? Perhaps not so much.

That was the message to investors Friday as disappointing earnings reports from Google Inc. and Caterpillar Inc. sent stocks down sharply.

The Dow Jones industrial average, which closed above 14,000 for the first time on Thursday, slumped 149.33 points, or 1.1%, to 13,851.08. It was down as many as 202 points in the morning.

Renewed concerns about rising financing costs for corporate takeovers also hurt stocks.

Some investors fled to Treasury bonds as a haven. The yield on the 10-year Treasury note fell from 5.02% on Thursday to 4.95%, the lowest since June 4.

The reports from Google, a technology bellwether, and Caterpillar, an industrial giant, rattled investors because those two sectors have spearheaded the recent market advance that culminated Thursday with the Dow closing above 14,000, less than three months after topping 13,000.

Caterpillar blamed a 21% drop in second-quarter earnings in part on reduced demand for construction equipment, a reminder of the drag the sinking U.S. housing sector is exerting on the economy.

“The Caterpillar news is more disturbing than the Google news,” said A.C. Moore, investment strategist for Dunvegan Associates in Santa Barbara. “Whether Google earns a lot of money or not [in a quarter], it’s still expanding. Whereas Caterpillar speaks to a lot of things -- the home market and the level of general economic activity.”

Other investment pros, however, say the sell-off does not herald the start of bigger problems.

Major stock indexes often struggle after reaching new highs as investors move to lock in profits, said John Bollinger, who runs Bollinger Capital Management in Manhattan Beach.

Beyond that, he said, the market has been led higher by industrial, telecom and natural-resources stocks, which wouldn’t be happening if investors thought the economy was petering out.

“This isn’t a picture of a sinking market,” Bollinger said. “This is a forecast for a strong economy.”

Volatility has been rising on Wall Street even as the market has advanced in recent months. The Dow plunged 148 points July 10, only to follow that two days later with a 283-point surge, its biggest in years.

Investors have been struggling to understand how much worse the housing market’s woes will get and how much they will depress the economy overall.

Optimists concede that the lengthy bull market is probably in its latter stages but say it isn’t over yet.

“We’ve gone through these periods where we’ve had these panic attacks, and this is a panic attack,” said Brian Wesbury, chief economist at First Trust Advisors in Lisle, Ill. “This is a panic attack, not a heart attack.”

Caterpillar, one of the 30 Dow stocks, fell $3.78 to $83.20 after reaching an all-time high Thursday. The stock rose from a session low of $78.26 as the company said it still expected sales to reach a record $44 billion this year, fueled by foreign demand.

Google slumped $28.47 to $520.12. The company late Thursday said second-quarter earnings rose 28%, well below analysts’ estimates, because of expansion costs.

The Nasdaq composite index, which includes Google, sank 32.44 points, or 1.2%, to 2,687.60. The S&P; 500 index slid 1.2% to 1,534.10. Losers topped winners by more than 3 to 1 on the New York Stock Exchange.

Large-company stocks have led the rally in recent months, in part on the belief that strong demand from fast-growing foreign economies would offset weakness in the U.S. economy.

IBM had helped drive the Dow to a record Thursday after the tech giant’s quarterly profit report beat expectations, helped by double-digit foreign sales growth. IBM eased $1.05 to $114.81 on Friday.

The weak dollar -- which hit a new low against the euro Friday -- is bolstering many U.S. multinational companies’ sales and earnings abroad.

In other trading, near-term crude oil futures in New York slipped from an 11-month high, losing 35 cents to $75.57 a barrel.

For the week, the Dow slipped 0.4%, the S&P; 500 lost 1.2% and Nasdaq was off 0.7%.

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