Stocks Fall on Profit Worries

Lower forecasts for corporate earnings -- and an analyst downgrade of investment banking shares --weighed on the market Tuesday

The market may be awaiting two big events in the coming days -- Friday's release of the November jobs report and the Federal Reserve's decison on interest rates next Wednesday -- but investors found a few other things to fret about Tuesday. Stocks closed lower amid continuing worries about corporate profits. Financial issues led the market lower after JP Morgan cut earnings estimates for big Wall Street firms.

On Tuesday, the Dow Jones industrial average finished lower by 65.84 points, or 0.49%, at 13,248.73. The broader S&P 500 index shed 9.63 points, or 0.65%, to 1,462.79. The tech-heavy Nasdaq composite index fell 17.30 points, or 0.66%, to 2,619.83.

Activity in the broader market was negative Tuesday. On the New York Stock Exchange, 21 shares declined in price for every 12 that advanced. Nasdaq breadth was 19-10 negative.

Investors stayed close to the sidelines ahead of Friday's November jobs data, which should shed more light on what to expect from next week's Federal Reserve policy meeting.

Most observers expect the Fed to cut interest rates to help spur economic growth. But this is not a given, says S&P MarketScope, and how much of a cut might occur is under debate.

On Tuesday, Goldman Sachs (GS) analysts lowered their 2008 earnings estimates for the S&P 500. Analysts are also slashing earnings estimates for the fourth quarter. A month ago, analysts were expecting a 10.1% rise in fourth-quarter profits, according to Reuters Estimates. This week, they expect earnings to inch up just 2.1%.

Meanwhile, JP Morgan (JPM) analysts cut estimates for earnings of big banks Goldman Sachs, Lehman Brothers (LEH), Morgan Stanley (MS), and Merrill Lynch (MER). The move, alongside a Punk Ziegel downgrade of Bear Stearns (BSC), Goldman, and Lehman to sell from market perform, kept financial stocks under pressure Tuesday.

Also Tuesday, mobile phone maker Nokia's (NOK) predictions for lower handset selling prices in 2008 disappointed investors, and H&R Block (HRB) ended a deal to sell its troubled mortgage subsidiary to a private equity firm.

In economic news Tuesday, the U.S. ICSC-UBS chain store sales index fell 2% last week, following a 0.1% decline the week before. On a year-over-year basis, sales are up 3.1%. The data may reflect problems with post-Thanksgiving seasonal adjustments, ICSC said. Also in the data: Only 22% of households say they have more than half of their holiday shopping complete, down from 25% at the same point last year.

In addition to the pace of holiday shopping, investors are closely watching employment data coming on Friday. Market participants are debating the next move on interest rates from the Federal Reserve, which meets on Dec. 11.

San Francisco Fed President Janet Yellen said Tuesday that worsening financial conditions and weaker-than-expected economic data have raised downside risks to the economic outlook. "These developments necessitate some rethinking of my growth forecast, and have highlighted the downside skew in the risks to that forecast," she said. Yellen said more economic data to be released ahead of the FOMC meeting on Dec. 11 would have to be incorporated into the central bank’s outlook.

More bad news continued to pour out of the housing sector. On Tuesday, Freddie Mac (FRE) said its Conventional Mortgage Home Price Index (CMHPI) Classic Series showed U.S. home values fell 1.3% in the third quarter on an annualized basis, the largest drop in 25 years. Year on year, home values appreciated 1.9% in the third quarter, which was down from 7.8% over the same period a year earlier.