NEW YORK (CNNfn) - U.S. stocks fell in volatile trading Thursday as fears of higher interest rates outweighed another batch of solid corporate earnings.
Explaining the sell-off, analysts cited concern that Friday's employment cost index will be stronger than expected, giving the Federal Reserve one more reason to hike interest rates ahead.
"It looks like this afternoon we're back to focusing on interest rates," Brian Finnerty, head of Nasdaq stock trading at C.E. Unterberg, Towbin, told CNNfn. "The employment cost index is one thing that (Fed Chairman Alan) Greenspan watches."
Finnerty forecasts a quarter percentage point rate hike by the nation's central bank next week. But he sees trouble ahead for the stock market if the Fed keeps tightening credit, which can hurt corporate profits by raising borrowing costs.
The Nasdaq composite index saw the day's biggest losses, as investors moved money from high-flying technology stocks into previously shunned automakers, drug companies and financial-services firms.
The technology-heavy Nasdaq fell 30.35 points, or 0.75 percent, to 4,039.56, building on Wednesday's 97-point plunge.
The Dow Jones industrial average, meanwhile, suffered a less-dramatic drop, benefiting from the sector shift, which has moved back and forth between the two markets for much of the week. The Dow lost 4.97 points to 11,028.02. And the broader S&P 500 fell 5.53 points to 1,398.56.
But the closing numbers don't illustrate the day's volatility. The Nasdaq traded in a 202-point range Thursday. The Dow swung 248 points.
Analysts see in these swings a market looking for direction.
"Depending on what day it is we focus on earnings, we focus on the Fed," Art Hogan, chief market analyst at Jefferies & Co. told CNNfn's Street Sweep. "We have to get the Fed behind us before we really pick a direction. I think that direction will be higher, but not until next Wednesday."
More stocks fell than rose, as decliners on the New York Stock Exchange beat advancers 1,578 to 1,461. Losers topped winners 2,290 to 1,826 on the Nasdaq.
Volume was heavy, with 1.8 billion shares changing hands on the Nasdaq. Big Board volume rose to 1.1 billion.
In other markets, the euro fell below the psychologically significant $1 mark. Bonds were mixed and the dollar dropped against the yen.
The Fed ahead
The employment cost index, a key indicator of wage inflation watched by Fed Chief Alan Greenspan, is expected to climb 0.8 percent in the fourth quarter, according to analysts surveyed by Briefing.com. The data may only add to fears that the Federal Reserve next week will begin launching a series of interest rate hikes to cool the economy and pre-empt rising inflation.
The Fed's three rate hikes last year, which brought its main lending rate to 5.50 percent, have had little apparent affect.
The latest government reports suggest the economy continued to strengthen while the labor market remains tight. Orders for durable goods surged 4.1 percent in December, well above expectations, the Commerce Department said Thursday. And the number of Americans filing for first-time jobless benefits last week rose a scant 1,000 to 266,000. The historically low figure comes as unemployment remains at a 30-year low.
Solid earnings
Fourth-quarter earnings season is shaping up to be a strong one. Of the 295 companies in the S&P 500 that have reported results, 195, or 66 percent, beat analysts' forecasts, according to earnings tracker First Call Corp. Sixty-three met Wall Street targets. Only 19 came in below expectations.
That trend continued Thursday, but it didn't lift many stocks.
JDS Uniphase Corp. (JDSU) fell 4-11/16 to 212-1/16 after the supplier of parts for fiber-optic equipment in phone networks late Wednesday posted second-quarter earnings that beat analysts' expectations.
Priceline.com (PCLN) fell 2-1/8 to 64-1/8, after the Internet auction site narrowed its losses more than expected in the fourth quarter and raised revenue estimates for 2000.
iVillage (IVIL) fell 3/16 to 18-1/2, after the Internet portal aimed at women posted a fourth-quarter loss 20 cents a share less than Wall Street estimates.
Online toy retailer eToys (ETYS) fell 4-3/8 to 16-7/8, after reporting a wider fiscal third-quarter loss that was in line with analysts' forecasts.
In non-tech earnings, Dow Chemical Co. (DOW) fell 2-3/16 to 119-1/16, after reporting higher fourth-quarter earnings Thursday that well exceeded analysts' estimates.
Eli Lilly & Co. (LLY) gained 1-1/2 to 64-1/4, after the drug maker said earnings rose 20 percent in the fourth quarter, meeting expectations.
GTE Corp. (GTE) rose 5/8 to 68-5/8, after the telephone company posted earnings of $961 million, or 98 cents a diluted share, in line with estimates of analysts.
(For a look at the day's earnings, click here.)
Sector shift
Investors Thursday moved money from tech stocks to recently out-of-favor sectors.
"This kind of erratic performance and bifurcation between the Nasdaq and the New York Stock Exchange has developed a rhythm," said Alan Ackerman, chief investment strategist at Fahenstock & Co. "I think it's the same kind of erratic rotation in play as people try to put themselves ahead of the next move."
Three of Nasdaq's biggest movers all fell. Microsoft (MSFT) dropped 5/8 to 98-3/4, Cisco (CSCO) slipped 9/16 to 106-5/8, and Dell lost 2-13/16 to 37-9/16. Dell (DELL) fell after warning its sales and profit will fall below expectations in the quarter ending Jan. 31.
Still, at least three investment banks threw their support behind the computer maker Thursday, upgrading Dell's stock. (Click here for a look at the day's company upgrades.)
Among other computer makers, Compaq (CPQ) fell 5/8 to 28-1/4 and Apple (AAPL) lost 3/16 to 110.
At the same time, carmakers, drug companies and financials services firms rose as investors sought undervalued areas. General Motors (GM) jumped 4-5/16 to 82-7/8, American Express (AXP) climbed 3-3/16 to 162-5/16, and Merck (MRK) gained 1-5/16 to 74-1/8. 
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