Stocks fall following results from Caterpillar, Google

By Tim Paradis

NEW YORK – Stocks pulled back Friday, retreating from record levels following disappointing results from longtime favorites Caterpillar Inc. and Google Inc. The Dow Jones industrials fell more than 120 points.

Falling bond yields – often a catalyst for propping up stocks – perhaps helped stave off a deeper sell-off. But stocks moved decidedly lower even as the yield on the benchmark 10-year Treasury note at times slipped below the 5 percent threshold.

The drop in stocks came a day after the Dow finished above 14,000 for the first time and the Standard & Poor’s 500 index likewise logged a record close. While a retrenchment might not be surprising following weeks of somewhat volatile trading and the big gains Thursday, Caterpillar has been one of the best-performers among the 30 stocks that make up the Dow and a big contributor in the blue chips’ march to 14,000. The heavy equipment maker unnerved investors when its results came in well below expectations.

Technology shares also took a hit after a strong run Thursday. Google turned in a second-quarter profit that fell short of Wall Street’s high expectations. Meanwhile, Microsoft Corp. also fell after disappointing investors.

“As people start to absorb the numbers and start to see the second-quarter numbers aren’t good as the first quarter, that starts to create some pullback a bit,” said Nick Raich, director of research at National City Private Client Group.

In midafternoon trading, the Dow fell 124.86, or 0.89 percent, to 13,875.55. The index earlier was down as much as 200 points.

Broader stock indicators also lost ground. The Standard & Poor’s 500 index fell 13.34, or 0.86 percent, to 1,539.74. The Nasdaq composite index fell 25.91, or 0.95 percent, to 2,694.13.

Not only was Wall Street likely to be kept busy digesting the first sizable disappointments of the second-quarter earnings season, but investors also had to brace for the possibility of added volatility because of the expiration of four types of options contracts – an occurrence known as quadruple witching.

Bonds rose, with the yield on the 10-year Treasury note falling sharply to 4.95 percent from 5.03 percent late Thursday. In recent months, rising bond yields following economic jitters had unnerved some investors as bond prices trade inversely to yields. But gains came as investors showed more willingness to pay for quality amid continued concerns about subprime loans souring.

The dollar was mixed against other major currencies, while gold prices rose.

Stocks have in recent sessions been able to strike higher despite rising oil prices. Often increases in oil can stir concerns of inflation and decreased consumer spending. On Friday, light, sweet crude fell 60 cents to $75.32 on the New York Mercantile Exchange. Oil traded above $76 Thursday for the first time in 11 months.

Looking past possible unease about rising oil, stocks forged gains earlier this week in part on earnings news. Of the 130 companies included in the S&P 500 that have reported quarterly results, earnings growth has been 1 percent, Raich said. However, he noted the companies were expected to show flat profits so the results are better than expected. Still, he said, “the margin by which companies are beating estimates in the second quarter is so far the lowest we’ve seen in five years.

“With some high expectations and some complacency in the market, the chances of a near-term pullback have gone up over the past month,” he said, arguing that Wall Street’s expectations for corporate profit growth are too high.

“I’d like to see a pullback and see the expectations come down a bit to more achievable numbers.”

In corporate news, Caterpillar cited lackluster sales in North American construction markets as well as a bigger-than-expected increase in operating costs among other reason. However, the company left its full-year profit forecast unchanged. Caterpillar was by far the weakest performer among the Dow stocks, falling $6.48, or 7.5 percent, to $80.50.

Google fell $27.92, or 4.7 percent, to $522.67 after its earnings before certain costs missed Wall Street’s forecast. Still, the company saw revenue jump 58 percent to $3.87 billion. Investors also fretted as profit margins narrowed as the company spent to hire more workers and acquire content for its Web sites.

Microsoft, which like Caterpillar is part of the Dow, fell 50 cents to $31.01 after its earnings met expectations but failed to dazzle investors after several robust quarters that topped forecasts.

Intuitive Surgical Inc. surged $45.36, or 30 percent, to $195.44 after the company saw a bigger increase in its second-quarter profit than Wall Street had expected amid greater demand for its da Vinci robotic surgical system.

PMC-Sierra Inc., a chip maker, turned in a narrower second-quarter loss. Its results excluding one-time items met analysts’ projections. The stock advanced 42 cents, or 5.2 percent, to $8.44.

While no major economic news was slated for release Friday, St. Louis Federal Reserve President William Poole weighed in on the subprime mortgage market in a speech in St. Louis. He argued Wall Street was right to punish shares of companies that made bad bets by offering loans to borrowers with spotty credit history.

Concerns about an unraveling of subprime loans have dotted Wall Street’s advance in recent months. Investors grew skittish earlier in the week – helping send stocks lower in Wednesday’s session – following word that two Bear Stearns Cos. hedge funds were left essentially worthless following bad bets on the subprime lending market. As home values in parts of the country have fallen, some borrowers behind on payments have found it harder to tap into their home equity to square away their debts. Fed Chairman Ben Bernanke also warned Thursday that the situation with subprime loans would grow worse before improving.

Declining issues outnumbered advancers by more than 3 to 1 Friday on the New York Stock Exchange, where volume came to 1.41 billion shares.

The Russell 2000 index of smaller companies fell 11.91, or 1.40 percent, to 839.94.

In market action abroad, Japan’s Nikkei stock average rose 0.23 percent. Britain’s FTSE 100 fell 0.83 percent, Germany’s DAX index fell 1.46 percent, and France’s CAC-40 fell 1.79 percent.