Shares Tumble on Weak Company Earnings Reports

The growing list of downbeat financial announcements from American companies generated on Friday the worst stock sell-off in nearly four months.

General Electric and McDonald's disappointed analysts and sounded cautionary notes about future global economic growth. That came on the heels of weak reports on Thursday from the technology giants Google and Microsoft.

With the shadow of the 25th anniversary of the 1987 stock market crash hanging over the market, share prices began dropping Friday morning and fell all day, leaving the Standard & Poor's 500-stock index down 1.66 percent, or 24.15 points, to 1,433.19. It was the worst single day for the index since June 21, when investors were worried about the European debt crisis.

Corporate earnings have served as perhaps the strongest engines of economic growth since the financial crisis, and have helped fuel a broader market rally. The benchmark S.& P. index is still up 14 percent for the year.

While analysts have expected profits to grow at a slower rate, they are now concerned about slowing revenue, which can be a purer indicator of economic health. Among the quarter of the S.& P. companies that have reported earnings so far, revenue rose just 0.8 percent, below the 1.5 percent that had been anticipated.

"This is an indication of what consumers are doing globally, and investors clearly don't like it," said Kim Caughey Forrest, a portfolio manager at the Fort Pitt Capital Group. "The consumer has decided not to spend that marginal dollar."

Despite those concerns, Friday's sell-off lacked the panic that has been a part of so many other big down market days over the last few years. This time around, shares moved down in an orderly fashion, and after it was over, some traders and investors said that while they were prepared for company profits to grow at a slower pace, they were not worried that earnings would disappear.

"It's really a paring back of recent optimism, as opposed to a pessimism that will last for weeks," said Ryan Larson, the head stock trader at RBC Global Asset Management. "This is a normal healthy thing for the markets to go through."

One major threat is increasingly hanging over conversations across Wall Street: the fiscal cliff that the economy could go over if Congress and the White House do not find a way to avert looming tax increases and spending cuts by the end of the year. While the deadline has been expected all year, most investors have pushed it aside and assumed that politicians will reach a compromise.

"Now it's becomes a more immediate issue, and everybody realizes it is going to be hanging over the market but not resolved," said Ed Clissold, the chief global strategist at Ned Davis Research.

Mr. Clissold said he expected investors to think more about the fiscal cliff as the election approached, particularly if neither of the candidates talked about how they planned to deal with the problem.

The recent choppy market has come at the same time that several reports indicate that the economic recovery may be gaining firmer footing. The Bureau of Labor Statistics said on Friday that the unemployment rate fell in 41 states — the latest indication that the job picture may be improving. While data on existing-home sales on Friday came in lower than expected, most signs point to the housing market emerging from its long slide.

The bigger economic worries have generally come from abroad. Spain's prime minister gave the market pause on Friday when he said that he had not yet decided whether to request a full bailout from the European authorities. But Spain is expected to take assistance if its situation grows worse.

The chairman of Goldman Sachs Asset Management, Jim O'Neill, said Friday that his models showed the global economy gaining momentum for the first time since late last year.

But for the immediate future, the focus continued to be on corporate profits and revenue.

At General Electric, analysts who expected revenue to rise $1.6 billion from the quarter a year ago were disappointed when they rose only $1 billion. Shares of the company dropped 3.4 percent on Friday, but they are up nearly 23 percent for the year.

The biggest disappointment this earning season has come from the technology stocks that have led the markets up for most of the year. Apple was heralded earlier this year when its stock market capitalization rose above $600 billion. But since hitting a high in mid-September, its share price has fallen 13 percent, bringing its market capitalization down to the more pedestrian $571 billion.

The technology-heavy Nasdaq composite index was hit by the steepest drop among the indexes on Friday, declining 2.19 percent, or 67.24 points, to 3,005.62. The Dow Jones industrial average fell 205.43 points, or 1.52 percent, to 13,343.51.

Many executives have been warning that future revenue and profits may end up growing more slowly than they had expected as a result of a recession in Europe, and the slowdown in China and elsewhere in the developing world.

So far, 17 companies have given what is known as negative guidance for future profit growth, and none have given positive guidance, a Thomson Reuters analyst, Greg Harrison, said.

The chief executive at McDonald's, Donald Thompson, said Friday morning that so far fourth-quarter sales were "currently trending negative."

Taking a step back, corporate profits are still expected to grow this year, though just in the single digits, rather than the double digits that have become common over the last three years. What's more, most analysts expect that profit growth will go back up to the double digits in 2013.

"We had a great year so far, and perhaps it did get ahead of itself," said Ms. Caughey Forrest of Fort Pitt. "This was a rational pullback based on rational information."

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Shares Tumble on Weak Company Earnings Reports

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