U.S. Stocks Fall as Earnings Concern Overshadows Bank Plan

By Lynn Thomasson

Oct. 14 (Bloomberg) -- U.S. stocks fell a day after the market's biggest rally since the 1930s as a worsening outlook for earnings forced investors to look beyond a $2 trillion global push to rescue banks.

PepsiCo Inc. lost 12 percent, the most since 1982, after lowering its profit forecast as customers cut back on snacks and soft drinks. Microsoft Corp. and Intel Corp. slid more than 5 percent as analysts said demand for computers is slowing. Morgan Stanley, Citigroup Inc. and Merrill Lynch & Co. added more than 18 percent, sending banking shares to a third straight advance.

``Notwithstanding the government and Treasury's actions focusing on financials, the general economic environment has deteriorated quite a bit in the last five or six weeks,'' said Jonathan Armitage, head of U.S. large-cap equities at the American unit of Schroders, the U.K. manager of $259 billion. ``You're just seeing different parts of the equity market reacting to that.''

The Standard & Poor's 500 Index slipped 5.34 points, or 0.5 percent, to 998.01 after gaining 12 percent yesterday. The Dow Jones Industrial Average decreased 76.62, or 0.8 percent, to 9,310.99 after a 936-point rally yesterday. The measure swung more than 700 points from its low to its high today. The Nasdaq Composite Index declined 65.24, or 3.5 percent, to 1,779.01.

The S&P 500 pared its biggest one-day advance since 1939 and the Dow trimmed its best rally since 1933. The S&P 500 is down 32 percent in 2008 as losses and writedowns from mortgage-related investments at financial firms worldwide top $637 billion. The S&P 500 is valued at 12.1 times the estimated profit for its companies. When that price-to-earnings ratio sank to 10.9 on Oct. 10, it was the cheapest compared with the multiple using trailing profit since June 1985.

PepsiCo, Coca-Cola

PepsiCo fell 12 percent to $54.40. The world's second- biggest soft-drink maker and largest snack producer said it will cut 3,300 jobs after posting profit that fell more than analysts estimated and lowering its forecast for the rest of the year.

Coca-Cola Co. tumbled 7.5 percent to $43.73 for the steepest drop in the Dow average. The biggest soft-drink company has fallen every day except twice in October.

The S&P 500 Consumer Staples Index slipped 2.6 percent. The measure of grocery stores, cigarettes makers and food companies is this year's best performer with a 15 percent loss, half the drop in the broader S&P 500.

Once companies ``start getting weakness in the revenue line, profitability will start to deteriorate,'' said Mark Demos, a Minneapolis-based fund manager at Fifth Third Asset Management, which oversees $21 billion. ``What people are fearing is how bad is it going to get.''

Microsoft, Intel

Microsoft declined 5.5 percent to $24.10. Credit Suisse Group AG reduced its earnings forecasts over the next two years. The company will earn $2.10 a share in fiscal 2009, analyst Philip Winslow said in a research note, down from his previous forecast of $2.13. Profit in the following year will be $2.44 a share, less than a prior estimate of $2.53.

Intel slumped 6.2 percent to $15.93. Friedman Billings Ramsey Group Inc. said earnings estimates are likely too high for the world's biggest chipmaker because of decreased desktop computer demand. Intel clawed back 4.6 percent in trading after U.S. exchanges closed. The world's biggest chipmaker exceeded third-quarter earnings estimates as orders for cheaper computer processors bolstered sales.

The S&P 500 Information Technology Index declined 3.9 percent.

`Very Risky'

``Jumping in with both feet is very risky at this point,'' Richard Weiss, who oversees $60 billion as chief investment officer at City National Bank in Beverly Hills, California, told Bloomberg Television. ``We're not out of the woods yet.''

Freeport-McMoRan Copper & Gold Inc. dropped 9.8 percent to $40.94. The world's largest publicly traded copper producer may defer projects to conserve cash amid plunging metal prices and a freeze in credit markets, the company's Chief Executive Officer Richard Adkerson said in an interview in London.

Alcoa Inc. fell 6 percent to $12.99. The largest U.S. aluminum company was downgraded to ``equalweight'' from ``overweight'' at Barclays Capital on concern profit margins will shrink as economic growth weakens and aluminum prices drop.

S&P 500 raw-material producers slumped 3 percent.

More than 50 companies in the S&P 500 are slated to report third-quarter earnings this week. Wall Street analysts haven't cut forecasts for record profits, even after the seizure in credit markets caused banks to stop lending to each other and prompted an unprecedented effort to cushion global economies.

`Downside Risks'

For the fourth quarter, analysts say companies in the S&P 500 will earn about $241 billion, the most ever. The benchmark index for U.S. stocks plunged 18 percent last week, its worst slide in 75 years, amid concern surging borrowing costs will trigger a global recession.

``There are significant downside risks still to the market and the economy,'' Nouriel Roubini, a New York University professor of economics, told Bloomberg Television. ``We're going to be surprised by the severity of the recession and the severity of the financial losses.''

Roubini, who predicted the financial crisis in 2006, said unemployment will reach 9 percent, home prices will fall another 15 percent and the recession will last 18 to 24 months. Microsoft co-founder Bill Gates yesterday also predicted the jobless rate may peak at more than 9 percent. The rate stood at a five-year high of 6.1 percent last month.

Real-Estate Sell-off

S&P 500 real estate companies fell 8 percent as a group, the most among 24 industries, on signs the slowing economy will hurt demand for commercial leases. Office vacancies in U.S. downtowns rose to 10.6 percent in the third quarter, the highest since the fourth quarter of 2006, as employment fell nationwide and companies put office space up for sublease, real estate broker Cushman & Wakefield said.

Simon Property Group Inc. dropped 8.5 percent to $72.07. Vornado Realty Trust slid 10 percent to $71. ProLogis declined 13 percent to $27.06.

Financial stocks made up the 23 biggest gains in the S&P 500, each with rallies above 13 percent. The S&P 500 measure of banks, insurers and asset managers climbed 6.4 percent after a 10 percent gain yesterday. The group is still down 41 percent this year.

Morgan Stanley jumped 21 percent to $21.94. Citigroup added 18 percent to $18.62. Merrill Lynch gained 21 percent to $21.35. Goldman Sachs Group Inc. climbed 11 percent to $122.90. Regional banks KeyCorp and Huntington Bancshares Inc. each rallied more than 50 percent and National City Corp. increased 35 percent.

`Dramatic Step'

Paulson urged banks receiving the government capital to use it to spur economic growth and not hoard it, while not identifying any of the lenders targeted. ``Thousands'' of financial companies will participate in the plan, which boosts bank capital in exchange for preferred stock, Paulson said in a statement.

``Financials are much more attractive now that the government has taken this dramatic step,'' said Tom McManus, who oversees $16 billion as chief investment officer for Wachovia Corp. in Charlotte. ``I think it probably makes sense to defer some discretionary spending to be investing in stocks.''

Goldman, Morgan Stanley and 10 other banks were raised to ``buy'' by Citigroup analyst Prashant Bhatia, who called the government's actions a ``game changer.''

The government's plan to inject cash into financial institutions, coupled with similar actions by countries around the world, may jumpstart the stalled global financial system, Blackstone Group LP Chief Executive Officer Stephen Schwarzman said at the Super Return Middle East conference in Dubai.

Europe's $1.8 Trillion

The U.S. initiative followed an announcement that France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion to guarantee bank loans and take stakes in lenders.

Money-market rates fell on expectations the plans will bolster lending. The London interbank offered rate, or Libor, that banks charge each other for three-month dollar loans slid 12 basis points to 4.64 percent today, the biggest drop since March 17, according to the British Bankers' Association. It was at 4.82 percent on Oct. 10, the highest level since December.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.