NEW YORK (CNN/Money) - U.S. stocks fell Wednesday but found some poise to come off session lows, after an earnings warning from J.P. Morgan and Oracle's cautious forecast spooked the major indexes and cast doubts about a profit recovery.

The Dow Jones industrial average lost 35.10 to 8,172.45, retracing about 150 points above the low of the session. The Nasdaq composite lost 7.81 to close at 1,252.13, also coming off its lows. The Standard & Poor's 500 index dropped 4.06 to end the day at 869.46.

All three indexes had briefly visited positive territory during the final hour of trading.

Disappointing news on the corporate earnings front hammered stocks for most of the session and overshadowed upbeat economic data on inflation and the trade deficit.

Financials were the hardest hit group on the blue-chip index after a warning from J.P. Morgan and an estimates downgrade for Citigroup. Weakness in software issues -- sparked by lukewarm guidance from Oracle -- plagued the Nasdaq and also spread gloom to chips and networking stocks.

Moreover, market watchers said the late-day turnaround was not a reflection of any improvement in the fundamentals.

"We're [seeing] some good old-fashioned short-covering in over-sold market conditions," said Bryan Piskorowski, market analyst with Prudential Financial. "There's a 'take no prisoners' kind of market mentality at play. Investors are playing it close to the vest and the feeling is that more can go wrong than can go right."

Piskorowski said cheapness in stocks attracted late-day buyers back into the markets.

"But the big picture is that there's no catalyst for the market. This is seasonally the weakest month of the year. The economy is nothing to write home about. The market is building against this tide every day," Piskorowski added.

Charles Payne, chief market analyst with Wall Street Strategies, said investors are not convinced that the economic recovery has enough momentum to jumpstart an improvement in corporate profits any time soon.

"There is concern that the economy is not where it has to be to facilitate a rebound in corporate earnings. Yesterday (Tuesday), we had surprisingly weak data on manufacturing activity," said Payne. "The air of enthusiasm is starting to seep out of the markets and there's a realization that it's going to take a long time to go from recession to expansion."

Adding to the growing list of warnings, No. 2 computer services firm Electronic Data Systems (EDS: down $1.30 to $36.46, Research, Estimates) warned after the close on its third and- fourth quarters, citing continued softness in the information technology services sector. EDS shares plunged $9.71 to $26.75 in after-hours trading.

In Thursday's lineup, investors get the latest read of the weekly employment numbers at 8:30 a.m. ET.

Also on tap is data on housing starts and on building permits. On the back of low mortgage rates, economists forecast housing activity perked up in August at an annual rate of 1.65 million, while building permits are expected to come in at an annual rate of 1.69 million.

Express freight carrier FedEx (FDX: down $1.60 to $42.80, Research, Estimates) reports quarterly earnings. Analysts forecast a profit of 49 cents a share, according to First Call.

Dow component J.P. Morgan (JPM: down $1.11 to $20.44, Research, Estimates) warned late Tuesday that its third-quarter profit will fall below its second-quarter result, citing bad loans and sluggish trading revenue, and the company did not rule out the possibility of job cuts. Credit rating agencies Standard & Poor's and Fitch Ratings downgraded Morgan's $42.4 billion in debt.

Several brokerages rushed to cut estimates on the investment bank. Credit Suisse First Boston trimmed its 2002, 2003 and third-quarter estimates on J.P. Morgan, citing higher credit costs and weaker trading profits. Merrill Lynch also cut its 2002 and 2003 estimates, while Goldman Sachs lowered its 2002 and 2003 estimates on the firm.

"Poor J.P. Morgan. The company has got nailed on everything from Enron to Argentina and bad loans," Michael Farr, president of Farr Miller & Washington, told CNNmoney Morning. "But if we see the economy recover, the financial services will do well."

Morgan Stanley said in a research note that although J.P. Morgan's troubles are not new news, "the severity of the problem is somewhat surprising. Despite S&P's downgrade, the bank is still one notch above what we view as critical levels. The company now has less wiggle room and we think it could put additional pressure on management to consider its dividend policy by late 2002/early 2003."

Compounding the problems for the sector, UBS Warburg slightly trimmed its third- and fourth-quarter estimates for Citigroup (C: down $0.69 to $29.11, Research, Estimates), citing a challenging market environment.

Merrill Lynch (MER: down $0.31 to $35.51, Research, Estimates), Goldman Sachs (GS: down $0.46 to $70.41, Research, Estimates), and Bank of America (BAC: down $1.75 to $66.30, Research, Estimates) reacted to J.P. Morgan's warning independently of each other, with no apparent trend set.

Brokerage Bear Stearns (BSC: up $0.93 to $60.43, Research, Estimates), however, reported a third-quarter profit that jumped 22.2 percent from a year earlier, beating Wall Street forecasts by a penny a share. The news failed to help lift the company's shares.

Outside the financials, PC maker IBM (IBM: down $2.20 to $69.55, Research, Estimates) also took a hard knock, while diversified conglomerate General Electric (GE: down $0.35 to $27.35, Research, Estimates) was the recipient of bearish analysis from a published report in the Wall Street Journal, speculating that GE's nine-year streak of logging double-digit percentage earnings growth could soon come to an end.

There were no hugs or kisses either for chocolate maker Hershey Foods (HSY: down $8.81 to $65.00, Research, Estimates) after its board took the company off the auction block. Hershey shares plunged in early trade. Banc of America downgraded the stock to "market perform" from "buy."

But Eastman Kodak (EK: up $0.78 to $28.39, Research, Estimates) was a rare bright spot on the Dow. The maker of photographic film and equipment. raised its third-quarter earnings estimates slightly, attributing the move to its cost-cutting efforts.

The Nasdaq battled headwind from weakness in software stocks, triggered by some less-than-stellar forward guidance from software maker Oracle (ORCL: down $0.71 to $8.32, Research, Estimates).

Oracle late Tuesday posted a first-quarter profit in line with forecasts, but revenue was slightly below projections. The company said its second-quarter earnings and revenue are expected at the low end of analysts' expectations.

Merrill Lynch reduced its fiscal 2003 and 2004 earnings and revenue estimate for Oracle, while Goldman Sachs trimmed its 2003 estimates.

Shares of sector mates Microsoft (MSFT: up $0.46 to $47.75, Research, Estimates), PeopleSoft (PSFT: down $0.28 to $13.95, Research, Estimates), and Siebel Systems (SEBL: up $0.08 to $8.24, Research, Estimates) initially saw collateral damage, suffering declines, before recovering.

European markets tumbled, led by weakness in banking and insurance stocks, while Asian-Pacific stocks closed lower Wednesday, following the lead of the U.S. markets. Tokyo's Nikkei index was down 0.8 percent, and might have suffered more except for the Bank of Japan's surprise decision to buy corporate shares held by Japanese banks.

Treasurys were mixed, with the 10-year note yield at 3.83 percent, the lowest level in four decades. The dollar weakened against the yen and euro.

Light crude oil futures gained 26 cents to $29.58 a barrel in U.S. trading, buoyed by fresh U.S. data from the American Petroleum Institute indicating a sharp drop in oil inventories.

Market breadth was negative. On the New York Stock Exchange, decliners beat advancers 9-to-7 as 1.3 billion shares traded. On the Nasdaq, decliners beat advancers 9-to-7 as 1.3 billion shares traded hands.

Inflation at the consumer level remained a distant threat in an economy struggling to emerge from a downturn.

The Labor Department said its Consumer Price Index, which measures retail prices paid by consumers, rose 0.3 percent after rising 0.1 percent in July. Excluding food and energy prices, "core" CPI also rose 0.3 percent after increasing 0.2 percent in July.

In a separate report, the Commerce Department said the trade gap, which measures the difference between imported and exported goods and services, saw a narrower-than-expected contraction to $34.5 billion in July from $37.16 billion in June.

"I think the economy is recovering and we won't get into a double dip. But trying to forecast when that economic strength shows up in earnings is a kind of fool's game. We've been playing it for about two-and-a-half years now," Farr said.

Tension between the United States and Iraq provided a backdrop to the day's trading. Earlier in the day, President Bush called Iraq's offer to readmit U.N. weapons inspectors a "ploy" and said his administration would work with Congress on a resolution authorizing him to use force against Saddam Hussein's regime.

Meanwhile, Defense Secretary Donald Rumsfeld also urged lawmakers on Capitol Hill to act before the United Nations and give immediate support for a possible U.S. military strike against Iraq.