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Markets: Microsoft drops 8%, other stocks also decline

By Seattle Times news services

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NEW YORK — Microsoft shares fell 8 percent yesterday, their biggest decline in two years, and led the stock market lower after a cautious outlook from the software company increased investor concerns that quarterly earnings don't justify current stock-price levels.

Microsoft's shares fell $2.30 to $26.61, trimming $24.9 billion from Microsoft's market value. The decline also cost Chairman Bill Gates $2.68 billion and Chief Executive Steve Ballmer $945.2 million from their personal fortunes.

The stock plunge was triggered after Microsoft reported financial results Thursday. The Redmond company posted a 28 percent gain in quarterly profit, but the results also showed a shortfall in business customers signing multiyear contracts.

This so-called deferred revenue, or orders signed but not yet booked as sales, fell $768 million in the first quarter ended Sept. 30. Microsoft had forecast a decline of $200 million to $300 million from the fourth quarter.

That shortfall raised investors' concern that the company's growth will slow further. Their doubts spread to other tech stocks, which suffered the greatest losses yesterday, but all three major market indexes notched losses for the week.

"Microsoft disappointed ... and that took the market down," said Larry Wachtel, market analyst at Wachovia Securities. "That's not to say many companies' earnings came in line or exceeded, but those got a 'so what' response. Those that disappoint, that becomes larger than life to investors."

It seems investors made a bad bet when they bid stocks sharply higher this month in anticipation of strong third-quarter earnings.

Companies didn't have the solid numbers to justify Wall Street's recent big advance, so the market retreated this past week.

Investors had set their hopes too high for the quarter, analysts said, but they're unlikely to be as impulsive in the near future.

"I think there was some kind of frenzy that had built up ahead of the earnings season," said Bernie Schaeffer, chairman of Schaeffer's Investment Research in Cincinnati. "Like there was going to be some kind of magic in what was going to be reported this month."

The earnings have been good, but not magical. With reports in from nearly two-thirds of the Standard & Poor's 500 companies, 87 percent either met or surpassed Wall Street's forecasts, according to Thomson First Call.

Overall, the companies reporting so far have beaten the consensus estimates of Wall Street analysts by 6.4 percent, Thomson First Call said. During the average quarter, companies outperform analyst estimates by about 3 percent overall.

But only the most stellar results could justify the prices set by eager investors this month, Schaeffer and other analysts said.

Even companies that released solid earnings this week, such as online retailer Amazon.com and leading biotechnology company Amgen, saw steep declines as investors became increasingly sensitive to some negative forecasts for the fourth quarter and 2004.

Most analysts are predicting strong fourth-quarter results, but say the first half of 2004 might not be as robust.

Now the question becomes whether this past week's sell-off is a temporary correction related to the run-up on high earnings hopes, or a deeper downturn related to next year's cloudy forecast, said Chuck Hill, director of research at Thomson First Call.

In such an erratic market, Schaeffer, the research firm chairman in Cincinnati, emphasized that it's more important than ever for investors to thoughtfully diversify their portfolios. He's advised investors this year to keep 25 to 50 percent of their holdings in cash, with additional exposure to gold as a hedge.

Yesterday's market activity

The Dow Jones industrial average fell 139.33, or 1.4 percent, for the week to 9,582.46 after declining 30.69 yesterday.

Boeing, one of the 30 Dow stocks, was off 96 cents, or 2.6 percent, to $36.28 following a 34-cent uptick yesterday.

The Nasdaq composite index fell 46.77, or 2.4 percent, for the week to 1,865.59 after stumbling 19.92 yesterday.

The S&P 500 index was off 10.41, or 1 percent, to 1,028.91 after sinking 4.86 yesterday.

Gold/oil

In U.S. trading, gold soared $17, or 4.6 percent, for the week to $389.20 per ounce, largely because of weakness in the stock market and in the dollar lately. Yesterday, gold gained $4.20.

Oil sank 78 cents, or 2.6 percent, for the week to $29.74 after declining 14 cents yesterday.

Material from Bloomberg News and The Associated Press is used in this report.

Copyright © 2003 The Seattle Times Company