Stocks closed sharply lower after earnings disappointments from Caterpillar and Google, as well as continuing concerns about the subprime mortgage market weighed on the major averages.
"The market is getting ragged," said Phil Roth, chief technical market analyst at Miller Tabak. "We've had big relative weakness in the financial stocks and rising interest rates and low-quality debt. The market is going to be suffering against those trends for a while."
Just one day after closing above 14,000, the Dow dropped as much as 202 points before paring some of those losses. Caterpillar was the biggest drain on the Dow, dropping about 5%. All of the S&P 500 sectors were firmly lower, with financials leading the decline. Worries about the slumping housing market and problems in the credit markets weighed on stocks and sent Treasury prices higher in a flight-to-quality bid. The benchmark ABX subprime index fell to a record intraday low.
"When there is a big cloud over the biggest group in the S&P 500, financials which account for about a quarter of the S&P 500, it's going to be very hard for the overall index to advance," said Douglas Peta, market strategist at J. & W. Seligman.
For the week, the Dow was off 0.4% but still up 11.1% for the year, the Nasdaq was down 0.8% but up 11.2% for the year and the S&P 500 was down 1.3% but up 8.1% for the year so far.
Disappointing earnings from Google helped to weigh on technology shares. Dow component Boeing and Apple were among the few bright spots trading higher.
"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."
Treasury prices rose, sending the yield on the 10-year note back below 5%.
Caterpillar said second-quarter profit fell 21%, hurt by weakness in North American construction markets. The heavy-duty equipment manufacturer said net income fell to $1.24 a share, sharply lower than the $1.49 a share expected by analysts polled by Thomson Financial. Caterpillar was, by far, the biggest percentage loser on the Dow.
Technology stocks, which led yesterday's rally, were weaker today after disappointing results after the bell on Thursday from two tech giants.
Internet giant Google posted a disappointing 28% rise in second-quarter profit after the bell Thursday. Shares in the search engine provider dropped sharply in pre-market trading.
Microsoft shares were also losing ground, after the computer maker only met analysts' expectations with a 7% net-profit gain in its fiscal fourth quarter.
Banking-giant Citigroup said its second-quarter profit rose 18% after pulling in record revenues, driven largely by strength in overseas operations. Citigroup, the biggest U.S. bank said net income rose to $1.24 a share, beating the estimate of $1.13 by analysts polled by Thomson Financial.
Oilfield-service-company Schlumberger said its profit increased 47% in the second quarter as strong demand internationally more than offset weakness in Canadian operations. Net income rose to $1.02 a share, more than the 95 cents a share expected by analysts.
Wachovia said second-quarter profit rose 24% to $1.22 a share. The nation's fourth-largest bank said it benefited from the acquisition of Golden West Financial Corporation and higher loans. The Charlotte-based company said net income rose to $1.22 a share, in line with expectations.
New York light sweet crude futures fell after briefly crossing the $76 a barrel mark.
And in corporate news, Dow Jones board director Dieter von Holtzbrinck resigned in protest of the proposed $5 billion takeover from Rupert Murdoch's News Corp .
European Stocks Close Lower
European stock markets closed lower as investors paused after a strong one-day performance Thursday.
The London FTSE-100 , the Paris CAC-40 and the Frankfurt DAX all finished lower.
Ericsson was one of the few companies reporting on an otherwise quiet earnings day, posting a weaker-than-expected profit rise to $1.4 billion in the second quarter. Shares of the telecom giant fell.
The future of Alitalia remained in doubt as the Italian government said the airline would be shut down unless a buyer is found. Shares of Alitalia were lower, as the government prepared to hold crisis talks over the national carrier.
Shares of Debenhams slumped 4% on news Icelandic investment firm Baugur Group denied it was planning to takeover the U.K. retailer, Dow Jones reported.
And magic was in the air for shares in Bloomsbury Publishing, gaining on the release date of "Harry Potter and the Deathly Hallows." But whether the publisher can conjure up big earnings without the help the blockbuster book remains unclear.
Asian Markets Higher
Asian markets rose in the afternoon session Friday, lifted by gains in technology shares such as LG Electronics. Australia and South Korea both closed at new records, bouyed by higher base metal prices and an optimistic earnings outlook.
South Korean shares finished over 2% higher to set a new record. The KOSPI is at the cusp of breaking the 2,000 level for the first time, as technology stocks such as LG Electronics surged on expectations for solid earnings in the remainder of the year. LG Electronics added 6.5%, while chipmaker Samsung Electronics gained almost 4%.
In Australia, the S&P/ASX 200 Index rose to set a 35th record closing high this year, as
higher metal prices boosted mining firms while ING Industrial Fund raced to a record after Goodman Group took a stake.
Tokyo's Nikkei 225 Average ended just slightly higher with steel shares like Nippon Steel advancing following strong output data, but gains were limited as KDDI and Softbank fell on price war fears. Hoya, a Japanese high-tech glass maker set to
seal its takeover of Pentax, ended down after posting a 16.9% decline in quarterly profit.
China's Shanghai Composite Index rose more than 3% as investors bought into companies such as banks that are expected to post robust growth in first-half earnings.
Hong Kong stocks were higher and China plays climbed, boosted by the record close in U.S. blue chips, as surging crude prices sent oil shares rebounding. Mainland insurers leapt as Thursday's strong economic data reported by China raised expectations that the country's central bank would raise interest rates, a move that should boost insurers' investment income.