NEW YORK (CNN/Money) - A profit warning from Merck deflated a U.S. stock market rally Tuesday, even as the Federal Reserve continued slashing interest rates to lift the economy from recession.
Merck shares tumbled nearly 10 percent, sending the Dow Jones industrial average lower for a fourth straight session, and reminding investors that profits aren't expected to recover anytime soon.
"Merck came in and spoiled the party," Karen Hackett of Susquehanna Brokerage told CNNfn's Street Sweep.
The Nasdaq composite index ended well off its high in a session heavy with anticipation over the Federal Reserve's last scheduled meeting of 2001. Ultimately, the central bankers cut borrowing costs for the 11th time this year, taking the overnight intra-bank lending rate to a 40-year low of 1.75 percent.
Saying the economy shows no meaningful signs of strength, the Fed buoyed hopes for even cheaper money next year. But Merck's news, released in the final hour of trading, offset any Fed-induced optimism.
"Merck reminds us that this is about earnings," Hugh Johnson, chief market strategist at First Albany, told CNNfn's Street Sweep.
But even with the losses, the stock market is higher now than it was during the terrorist attacks, which occurred three months ago Tuesday. Still, the major indexes are poised to post a second straight annual decline for the first time since 1974.
The Dow Jones industrial average fell 33.08 to 9,888.37 after being up by as much as 94 points. Up as much as 40 points, the Nasdaq composite index ended with at 2,001.93, a 9.81 gain. The Standard & Poor's 500 lost 3.17 to 1,136.76.
Market breadth was mixed. On the New York Stock Exchange, declining stocks edged out advancing ones as 1.3 billion shares traded. Nasdaq winners beat losers 9-to-8 as 1.9 billion shares changed hands.
In other markets, Treasury securities rose. The dollar edged higher against the yen and dipped against the euro.
More cuts ahead?
Saying that "economic activity remains soft," the Fed in its statement signaled its year-long rate-cut campaign may not be over.
"I think what the Fed really did today is they kept the door open for further cuts," Mike Ryan, bond strategist at UBS PaineWebber, told CNNfn's The Money Gang.
Prospects for another cut could keep alive the stock market's run that began Sept. 21. But investors also want signs from companies that the business outlook is improving.
They didn't get any from Merck (MRK: down $6.29 to $60.70, Research, Estimates), which forecast that earnings per share in 2002 would be much lower than current Wall Street expectations.
Corporate profits are not expected to rise until next spring.
But not all the day's earnings news was bad. Nokia (NOK: up $1.71 to $25.50, Research, Estimates), the leading mobile phone maker, reaffirmed sales targets and said profits in the fourth quarter could top forecasts.
Gains spread to rivals Ericsson (ERICY: up $0.19 to $6.01, Research, Estimates) and Motorola (MOT: up $0.17 to $16.82, Research, Estimates).
Among the day's losers, shares of Dow component McDonald's (MCD: down $0.52 to $26.50, Research, Estimates) fell after Lehman Brothers downgraded the fast-food chain. The firm cited worries that discounting and fears of mad cow disease will take a bite out of profits.
Losses in General Motors (GM: down $1.69 to $48.65, Research, Estimates) also hurt the Dow. Italian car maker Fiat said it will issue $2.2 billion in bonds exchangeable into its 6 percent holding of GM stock.
Memorials Tuesday at Ground Zero, the New York Stock Exchange and elsewhere marked the three-month anniversary of Sept. 11. Since then, Afghanistan's Taliban have been all but defeated by U.S.-led forces, who are searching for Osama bin Laden, the suspected terrorist leader.
"No cave is deep enough to escape the patient justice of America," President Bush told cadets at the Citadel in South Carolina. In Washington, Attorney General John Ashcroft Tuesday announced what he said were the first federal indictments directly related to the attacks.
The market, meanwhile, has been rising since Sept. 11. The Dow industrials are up 3 percent since hijacked planes toppled the World Trade Center. Tech stocks have fared better, with the Nasdaq up 18 percent.
But the longest economic expansion on record came to an end last summer. And the job market is in tough shape, with November's unemployment rate rising to a six-year high.
The latest company to reduce payrolls, Kroger (KR: down $3.38 to $19.92, Research, Estimates), said profits in the fourth quarter will miss forecasts. Shares of Kroger, the NYSE's most actively traded stock, fell 14 percent. Losses spread to competitor Safeway (SWY: down $1.78 to $41.44, Research, Estimates).
Congress, meanwhile, remains deadlocked over an economic stimulus package, with Democrats wanting to increase benefits to laid off workers and Republicans eager to lower corporate taxes.
A year ago at this time, the federal funds rate stood at 6.50 percent, a stark contrast to Tuesday's new rate of 1.75 percent. Central bankers also lowered the rarely used discount rate to 1.25 percent from 1.50 percent.
By selling bonds and buying stocks, investors have for weeks been anticipating recovery next year. But rising bond yields, which move inversely to prices, complicates the task of Fed officials, who control only short-term borrowing costs. 
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