Earnings Reports Weigh Down Stock Market

European markets opened lower Thursday following the Nikkei's close at a five-year low in Japan overnight. Those drops came on the heels of Wednesday's dive in the U.S. stock market amid disappointing earnings reports from major companies.

Not even some encouraging news about the credit markets and a drop in oil prices could dispel investors' pessimistic mood.

The credit markets are thawing out and oil prices have come down a lot. Those are the kinds of things that are good for economic growth, and they ought to make stock investors pretty happy. And yet the mood on Wall Street remains glum.

Michael Holland, who chairs an investment firm called Holland & Co., says the markets are starting to realize how much damage has been done to the economy by the long credit crunch.

"Investors are left with the reality that we have a growing global slowdown, i.e., recession, in parts of the world that is looming for companies and their earnings," says Holland.

Stock prices took another big tumble Wednesday, falling to five-year lows. The Standard and Poor's 500 index lost more than 6 percent of its value and the Dow Jones industrial average fell almost as much.

And what's driving home that message this week is the sorry state of corporate earnings. This is the time when companies say how much they earned during the last quarter. Some, like McDonald's, have done well. But companies as diverse as Boeing, Merck and DuPont have all said their profits fell short of expectations. Mike Tarsala, an equities analyst at Thompson Reuters, points to what happened at Yahoo: It announced this week that it's laying off 1,500 people.

"People would have been shocked a year ago to have one of the stalwarts of Silicon Valley come out and say they were cutting jobs," says Tarsala. "I mean that's not a place where you cut jobs; it's a place where you use all the stock options at your disposal to lavish on employees to keep them."

The bad news from corporations is taking a toll on consumers, who are cutting back on spending, says Holland.

"When we've had the financial crisis we've had and the headlines have been so scarifying you simply have people looking at their bank statements, their 401(k)'s [and] the price of their houses — they become less inclined to make whatever that expenditure is," he says.

One harbinger of the downturn is a change in consumers' spending habits. Wal-Mart said yesterday that the chain's customers are much more concerned about their financial security than they were previously.

"One of the more disturbing things they said about the economy is they're seeing a spike in sales of baby formulas tied to paychecks, and what that's telling you is you're seeing an increasing number of households that are living paycheck to paycheck," says Tarsala.

And all that that has stoked fears that the United States, and the world as a whole, are in for a recession that will be longer and deeper than people once expected. That sent stock prices down sharply this week. Tarsala points out that during earnings season, big companies typically provide guidance to investors about how their company may do going forward.

"The CEOs are very cautious about what they're saying," says Tarsala. "They don't know what's coming; they're very focused on cutting costs wherever they can and shoring up their balance sheets. They're preparing for a storm."

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