NEW YORK (CNN/Money) -
U.S. stocks tanked Tuesday, with investors seeing a rising interest rate environment in the session's solid earnings and economic news.
After the close, technology leader Intel reported earnings that rose sharply from a year ago, but missed expectations, while fellow Dow component McDonald's raised its forecast, saying earnings would top estimates.
On Tuesday, the Dow Jones industrial average (down 134.28 to 10381.28, Charts) lost 1.3 percent, the Standard & Poor's 500 (down 15.76 to 1129.44, Charts) index lost 1.4 percent and the Nasdaq composite (down 35.40 to 2030.08, Charts) lost 1.7 percent.
Treasury prices tumbled, pushing yields higher. Commodities sold off and the dollar rose. Market breadth was very negative.
While the strong earnings and economic news were seen as good for sentiment, they were also seen as confirmation that interest rates, at more than 40-year lows, could potentially rise as soon as this summer.
In particular, interest-rate sensitive stocks and sectors such as financials, gold, copper and utilities declined Tuesday. Such fears are not likely to abate in the near term, leaving the stock market under pressure.
"The dollar's strength and the bond market's weakness right now is changing the way people are seeing things," said Peter Green, a technical market analyst at MKM Partners. "It's telling us that interest rates are likely to rise and that commodity prices are likely to come down."
"People are seeing that in large part, the drivers of the 2003 market gains, including the low interest rate environment and the weak dollar, are reversing," he added.
A bout of profit taking Tuesday after a few sessions of gains added to the declines, as did the market's continued inability to break out of its current trading range.
"We've hit some resistance on the indexes," said Kevin Caron, a market strategist at Ryan, Beck & Co. "Coming into March there were some valuation concerns coupled with the Iraq effect and the indexes have been struggling to break out."
Longer-term, "the earnings base is growing, and as the economy expands, you'll see better profit growth for companies, which will support stock gains," he added.
First-quarter earnings are expected to show growth of around 21 percent versus the same quarter a year earlier, according to a consensus of analysts surveyed by First Call.
Morning earnings reports from Johnson & Johnson, Merrill Lynch and others seemed to confirm this. A surprise surge in retail sales was bullish for the economic recovery. Sales in March jumped 1.8 percent versus an upwardly revised gain of 1 percent in February. Sales excluding autos rose 1.7 percent from a revised 0.6 percent in February. Both figures topped estimates.
After the close, Intel (INTC: Research, Estimates) reported earnings of 26 cents per share, up from 14 cents a year earlier and a penny less than what analysts surveyed by First Call were expecting. Revenue also rose from the year earlier, but missed expectations. The company's chief financial officer also said that technology spending is picking up, a major positive for the technology sector. However, the stock declined modestly after hours.
In addition, McDonald's (MCD: Research, Estimates) boosted its first-quarter earnings outlook after the close, due to strong U.S. sales. The company said it expects earnings of 40 cents per share, up from 29 cents a year earlier and 3 cents more than what analysts currently expect.
What moved?
Of the 30 stocks that comprise the Dow industrials, 27 fell. Alcoa (AA: down $0.83 to $33.43, Research, Estimates), Walt Disney (DIS: down $0.70 to $25.00, Research, Estimates) and McDonald's (MCD: down $0.75 to $28.27, Research, Estimates) were among the Dow's biggest losers.
A number of companies reported solid results, but you wouldn't necessarily know it from their stock prices.
Strength in its investment banking and trading businesses boosted Merrill Lynch (MER: down $1.12 to $58.61, Research, Estimates)'s results in the quarter. The Wall Street powerhouse reported a profit that nearly doubled from a year earlier and soundly beat analysts' forecasts. The stock, however, declined.
Merrill was not alone in the financial sector, with JP Morgan (JPM: down $1.52 to $40.04, Research, Estimates), Lehman Bros. (LEH: down $3.60 to $77.22, Research, Estimates) and others slipping, too.
Chipmaker Novellus Systems (NVLS: down $1.00 to $33.64, Research, Estimates) reported first-quarter earnings of 12 cents per share late Monday, up from a year earlier and more than what analysts were expecting, on revenue that rose 40 percent from a year earlier. Strong demand in the quarter led to the rise, and will fuel a continued rise in profit in the current quarter, the company said, all of which was a good start to the technology earnings period, analysts said. But Novellus, too, succumbed to selling and saw its stock lose close to 3 percent.
In other news, Time Warner (TWX: down $0.47 to $16.90, Research, Estimates) lost 2.7 percent following a report in the Washington Post that the Securities and Exchange Commission is gearing up to formally accuse the company of improperly booking more than $400 million in advertising revenue. Time Warner is the parent of CNN/Money.
On the upside, Dow component Johnson & Johnson (JNJ: up $0.19 to $51.39, Research, Estimates) reported earnings of 83 cents per share, up from 69 cents per share a year earlier and three cents higher than the forecast of a consensus of analysts surveyed by First Call. The company also boosted its fiscal-year 2004 earnings per share forecast to $3, when analysts currently expect earnings of $2.95 a share. Shares of the company managed to gain about 0.4 percent.
Additionally, security stocks continued to gather strength. Tuesday's big leader in the sector was Mace Security International (MACE: up $2.15 to $10.15, Research, Estimates), a maker of digital video recorders. The stock was active on news that the company will receive a percentage of the proceeds from the sale of stock by one of its biggest shareholders.
Market breadth was negative. On the New York Stock Exchange, where 1.41 billion shares traded, losers outnumbered gainers by more than six to one. On the Nasdaq, that ratio stood at more than three to one as 1.92 billion shares changed hands.
Treasury prices dropped sharply. The 10-year note lost 28/32 of a point, its yield moving up to 4.34 percent from 4.23 late Monday. The dollar gained versus the yen and euro.
Among commodities markets, NYMEX light sweet crude oil futures lost 56 cents to settle at $36.68 a barrel. COMEX gold tumbled $13.20 to settle at $407.70 an ounce.
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