Stocks Rocked by Earnings, Debt Worries

Disappointing quarterly profits were compounded by fears about the spreading subprime crisis. The S&P 500 tumbled almost 2%

by Ben Steverman

Disappointing earnings news and fresh alarms about debt markets sent stocks tumbling on Tuesday.

A wave of earnings news, much of it disappointing, hit the market in the morning. Countrywide Financial (CFC; -10.95%), American Express (AXP; -5.27%), DuPont (DD; -6.12%), Supervalu (SVU; -7.77%) and many other large firms issued profit reports that led the indexes' plunge.

Markets were later rocked when Bill Gross of PIMCO Bonds warned of a "sudden liquidity crisis in the high yield debt markets." Thanks to problems with subprime and other mortgage debt, lenders also seem to have lost their appetite for risky corporate debt, Gross wrote in his latest monthly commentary. That threatens the billions of dollars in leverage buyouts (LBOs) and stock buybacks in the stock market. "No longer," Gross wrote, "will stocks be supported so effortlessly by the double-barreled impact of LBOs and company buybacks."

Stocks, which spent all day down, took a turn for the worse late in Tuesday's session. The Dow Jones industrial average ended the day down 226.47 points, or 1.62%, to 13,716.95. The broader S&P 500 index lost 30.53 points, or 1.98%, to 1,511.04. The tech-heavy Nasdaq Composite index fell 50.72 points, or 1.89%, to 2,639.86.

Trading was active, with the vast majority of stocks taking a hit. For every 30 stocks falling in price, 3 were higher on the New York Stock Exchange. On the Nasdaq, the ratio was 26 to 5 negative.

With 174 members of the S&P 500 reporting earnings this week, this is a crucial time for the two-week old earnings season. Many market experts warn of volatility during earnings season. Corporate profits are projected to rise 6%, according to Reuters Estimates. The projections take into account earnings reports as they are released as well as estimates for companies with earnings still to come.

Keith Hembre, chief economist at First American Funds, says overall earnings are coming in "a touch higher" than analysts expected. Large companies with big overseas operations are doing much better than smaller firms dragged down by the slow U.S. economy, he says.

Hembre says he believes "credit is going to be tougher to come by in the corporate sector, because risk appetites will be less than they were." However, he says, a credit crisis could prompt the Federal Reserve to cut interest rates earlier than expected.

Among the earnings news Tuesday, American Express reported earnings of 88 cents per share in the second quarter, vs. 78 cents a year ago. Revenues rose 9%.

Texas Instruments (TXN; -4.5%) reported earnings of 42 cents, vs. 47 cents a year ago. Sales were 7.4% lower. The firm expects third quarter earnings of 46 to 52 cents per share.

Lockheed Martin (LMT; +3.59%) reported earnings of $1.82 per share, vs. $1.34 a year ago. Sales were up 7%, and the firm raised its prior 2007 earnings guidance by 45 cents per share.

Netflix Inc. (NFLX; -6.95%) was trading lower after disappointing investors with earnings of 37 cents, vs. 25 cents a year ago. Revenues were still up 27%, but sales and subscriber growth was hurt by competition, the firm says.

Countrywide Financial reported earnings of 81 cents per share, vs. $1.15 a year ago on a 15% decline in revenue. The firm lowered its 2007 earnings forecast, saying it expects the difficult conditions for housing and the mortgage market to continue.

McDonald's Corp. (MCD; -1.81%) reported earnings of 71 cents per share, vs. 56 cents a year ago. Revenue was up 12%.

United Parcel Service (UPS; +0.