October 23, 2018

The Dow is tumbling again as earnings fears spark selling

Maybe Corporate America isn't coming to Wall Street's rescue after all.

The Dow dropped 400 points on Tuesday morning after major US companies reported gloomy results and guidance. Disappointing numbers from Caterpillar and 3M reinforced ongoing concerns about how long blockbuster profits can last, especially given tariffs and rising costs.

The S&P 500 declined 1.6 percent and the Nasdaq tumbled about 2 percent.

"Investors are skittish about whether we've seen a peak in earnings," said Mark Luschini, chief market strategist at Janney Capital Management. "It's a schizophrenic market environment where things that didn't matter suddenly do."

Tech stocks, once the bright spot in the market, continued to take the brunt of the selling. Netflix and Amazon slid about 3 percent, while Apple and Facebook declined 2 percent.

Wall Street was also spooked by extreme turbulence in China, the epicenter of the trade war. The Shanghai Composite dropped 2.3 percent overnight. The sell-off wipes out a chunk of Monday's spike, the benchmark index's best day since March 2016.

A number of large American companies with exposure to growing trade disputes reported their quarterly financial results Tuesday. Investors are worried that a slowing Chinese economy and an escalating trade war could pinch profits.

3M (MMM) shares plunged 6 percent after the maker of Post-it Notes reported a dip in sales and weaker-than-expected profits. Worse, the Dow component downgraded its earnings forecast for the year.

Caterpillar (CAT), a closely-watched barometer of global growth, fell 8 percent as the maker of construction and mining equipment's record third-quarter profit was overshadowed by disappointing guidance. Caterpillar, also a member of the Dow, warned of "higher material and freight costs, including tariffs."

Harley-Davidson (HOG) shares lost 6 percent. The motorcycle maker grew sales and earnings, but it also suffered a 13.3 percent plunge in US sales due to "weakness" in the market. That was Harley's biggest sales slump in eight years, Bloomberg News reported. The company, which plans to shift some manufacturing overseas in response to the threat of tariffs, also warned of higher manufacturing expenses due to tariffs.

The results highlight lingering worries about whether the US economy and stock market can continue to grow rapidly.

"How long is this going to last?" asked Luschini. "Companies that only match earnings get punished. And ones that miss expectations get outright slayed."

But the news wasn't all gloom-and-doom from Corporate America. McDonald's logged declines in earnings and sales but managed to beat expectations.

United Technologies Corp., another major global company, raised its outlook. And Verizon said it grew profit and revenue more than investors anticipated.

Global growth concerns also weighted on the commodity markets. US oil prices tumbled 2.4 percent to about $67.75 a barrel, pressuring energy stocks. Copper slid more than 1 percent.

Overseas markets were sharply lower Tuesday. Hong Kong's Hang Seng index fell 3 percent in trading there, and Japan's Nikkei fell almost as much. The Dax in Germany was down 1.7 percent in early trading in Europe.

October has been a rocky month for stocks. The Dow is on pace for its worst month in more than two years.

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