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An earnings warning from Merck pulled blue chips lower today as Wall Street got another reminder of how weak the business environment remains.

The tech sector also suffered, although its losses were not as severe, on some bad corporate news in the semiconductor sector.

At 1 p.m., the Dow Jones industrial average was down 85.75 at 10,629.68. Broader stock indicators also retreated. The Nasdaq composite index lost 7.16 to 2,051.58, and the Standard & Poor's 500 index declined 10.68 to 1,226.36.

Merck dropped $5.17 to $69.30 after reducing earnings expectations for the second quarter and the year because of lower-than-anticipated sales of Vioxx, its arthritis and acute pain medication. Merck is a Dow component, so its losses strongly affected the blue chip index.

"Merck is the type of company you don't expect to miss. That's what's putting pressure on the S&P today," said Rafael Tamargo, director of equity research at Wilmington Trust. "This shakes confidence a little bit."

The Gap dropped $2.57 to $30.97 after announcing it would eliminate up to 700 jobs, about 7 percent of its work force, and scale back on expansion plans.

In the technology sector, ON Semiconductor Corp. fell 17 cents to $44.77 on word its second-quarter revenue will be 12 to 15 percent below the $361 million in the previous quarter because of weak business.

But those losses were offset by strength in networking and software stocks, including Cisco Systems, which rose 41 cents to $18.09, and Microsoft, up 47 cents at $70.31.

Warnings and layoffs have become common on Wall Street this month as second-quarter earnings reports begin.

Although most investors were expecting results to be weak, especially compared with last year when the economy was stronger, the extent of the damage has caught many off guard.

The bad news has also accelerated the pullback from this spring's huge rally, when investors bought stocks on hopes of a business turnaround by year's end. Now many market watchers are predicting that recovery will not occur before 2002 -- even if the Federal Reserve cuts interest rates for a sixth time this year as expected at its meeting next week.

The hope of another interest rate cut helped push stocks up Thursday, but many analysts are doubtful that another reduction will cure the market's woes with more bad earnings news still ahead.

Dime Bancorp fell 82 cents to $37.26 after New York's largest thrift said it's in talks to sell itself in a transaction that would offer a "modest premium" to the current share price. The Wall Street Journal reported the buyer is Washington Mutual, which fell $1.01 to $38.39.

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