Investors picked up where they left off a week ago, as stock prices hurtled to new highs with the Dow Industrials setting its second milestone of the year, the 14,000 level.
Records aside, the Dow closed the week with a loss of 0.4%, the S&P 500 shed1.3% and the Nasdaq eased 0.8%.
Merger news helped drive the market ahead a wave of big earnings reports later in the week. IHOPagreed to Buy ApplebeesInternational for about $2.1 billion, or $25.50 per share. In earnings news, McDonaldsshares rose on second-quarter guidance, while Mattel'sEPS figure was slightly better than expected.
Subprime jitters once again hit the market, depressing financial shares but the major indices managed to close modestly higher, extending gains from the previous week, even as crude oil edged higher, nearing a record.
"I think this is the realization there's a lot of money out there that missed the rally in the first half that's chasing performance," Arthur Hogan, managing director at Jefferies.
The Dow finally claimed 14,000 on an intraday trading basis as stocks powered higher amid stable oil prices, which had topped $75 a barrel, and a decline in the June PPI. Positive comments about economic growth and inflation by a Fed governor also helped lift the mood. The Dow closed higher for its fifth day in a row, its best run since May.
Among Dow components, Coca-Colabeat earnings expectations and American Express posted healthy gains after Goldman Sachs upgraded the company to buy from neutral, saying the stock was undervalued. Johnson & Johnson and Merrill Lynch also beat Wall Street expectations. Intel capped the dayafter the closing bell with strong earnings but concerns about its profit margin dragged down the stock.
"It's a cliche to say 14,000 is just a number, but I really think 15,000 is well within reach for the Dow by year end," said David Bianco, chief equity strategist at UBS. "Earnings growth may be slowing, but it's still growing at quite a healthy clip, mostly because of the global economy."
Investors had one eye on Washington, where Fed boss Ben Bernanke began two days of economic testimony before Congress, and another on Corporate America, as second-quarter earnings continued to pour in.
Bernanke made it clear that inflation remained a concern, given high commodity prices, and most observers took that to mean that Fed policy was on hold for some time, even if the central bank had lowered its growth forecasts.
Pfizer earningsdisappointed, as Lipitor sales slowed. JPMorgan beat estimates but its decision to set aside $1.5 billion for loan losses troubled investors. EBay also earned more than Wall Street expected and raised its sales guidance.
On the economic front, the June CPI report was mixed, but housing starts surprised with a gain.
At the end of a busy day for investors, the Dow had reduced a triple-digit loss to about 50 points.
"I think the Fed's downward revision of GDP for the remainder of this year and into 2008 is more at the heart of this selloff than anything else," said Marc Pado, U.S. market strategist at Cantor Fitzgerald. "The market is looking for the economy to reassert itself and it's a bit of a blow to the exception for future growth."
Another day of generally strong earnings and IBMin particular helped the Dow close above 14,000 for the first time ever. Motorola, however, was a major disappointment in the tech sector, posting a quarterly loss. Google shareswere also pounded in after-hours trading, following weaker-than-expected profit in what the company called a "seasonally slow quarter.”
Bernanke was back before Congress, paying particular attention to the housing slump. The Fed boss said that regulators had stepped up efforts to protect consumers from abusive mortgage practices, which contributed to the subprime mess.
"The large forces, such as liquidity which is very high and recent earnings are overcoming problems like subprime," according to Vinny Catalano, global investment strategist at Blue Marble Research. "So far it looks like the bias is still to the upside."
The S&P 500 also closed at a new record high, while the Nasdaq tacked on another three-quarters of a percentage point, regained the 2700 level.
Despite the decline, many analysts said the selloff wasn't cause for alarm.
"This drop is only going to be momentary," Sara Nunnally, senior analyst at Material Profits, told CNBC.com. "I would say we may have another 100-point drop and then find support at just about 13,700 on the Dow. After that, I think we will test 14,000 again."
Worries over the impact of the housing slump and losses from risky mortgages also weighed on stocks and the dollar, while government bond prices jumped.