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CNBC ON DIGG

Earnings Rally Starts to Run Out of Steam

Published: Friday, 23 Oct 2009 | 1:26 PM ET

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By: CNBC.com

Stocks relinquished earlier gains Friday as investors began to lock in some profits after an earnings-fueled rally this week.

In afternoon trading, the Dow was down nearly 100 points, or almost 1 percent. The S&P was down abou 0.8 percent.

Even the tech sector, which had gotten a boost from blockbuster earnings from Microsoft and Amazon, succumbed to the selling pressure, dragged down by chip and biotech stocks. A brief misunderstanding that Microsoft was lowering its full-year revenue forecast —it actually lowered its operating-expense forecast NOT revenue — may have also weighed on the sector.

Major U.S. Indexes

.DJIA

.NCOMP

.SPX

Microsoft [MSFT Loading... () ] held on to about a 7-percent gain, after earlier being up more than 10 percent, after the the software giant blew past earnings expectations for both earnings and revenue. This came a day after Microsoft released its new Windows 7 operating system.

"Microsoft is back. They are able to succeed despite heightened competition from Apple's share gain and Google's great brand," Katherine Egbert, an analyst with Jefferies & Co., told Reuters. "The numbers were unbelievable. An absolutely blowout."

And, while Microsoft lowered its operating-expense forecast for the full year, it didn't offer any revenue guidance.

Amazon [AMZN Loading... () ] shares soared more than 20 percent after the online retailer topped forecasts and delivered a strong revenue outlook. Amazon CEO Jeff Bezos said the company's Kindle e-book reader has become its top seller — both in terms of unit sales AND dollar sales.

American Express [AXP Loading... () ] also exceeded expectations as did competitor Capital One Financial [COF Loading... () ].

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Diversfied manufacturer Honeywell reported before the bell, beating estimates even though profit fell 15 percent to 80 cents per share.

Whirlpool, Schlumberger and Ingersoll-Rand also reported better-than-expected earnings.

More layoffs are coming in the media sector: Time Warner's [TWC Loading... () ] Time magazine unit is reportedly planning another round of job cuts.

The market's slide, despite the solid roster of earnings beats, raised questions about whether this latest rally that has taken the Dow above 10,000 has finally run out of steam.

Odd Haavik, CEO of Charles Monat Associates, said now might be the time for some profit-taking as this latest rally isn't based on fundamentals.

"I think there's a good chance things have gone about as far as they are going in the short-term," Haavik said on CNBC this morning. "I think right now is a beautiful time to take some money off the table."

Tech was the big winner this week, after blockbuster results from Apple, Microsoft, Amazon, Yahoo and SanDisk.

But Gerhard Fasol, CEO of Eurotechnology, said on CNBC this morning that the outlook for tech may be dimming.

"There are some dangers ahead," Fasol said. "The great news, I think, could be temporary."

Financials took a hit this week, despite solid results from JPMorgan. First, Obama's pay czar announced plans to cut the pay of executives at bailed-out firms by as much as 90 percent. And, bank analyst Dick Bove slapped Wells Fargo with a "sell" rating, saying there was serious erosion in the bank's loan quality in the third quarter.

Fed chief Ben Bernanke said today that regulators are considering requiring banks to hold more capital and other measures to avoid a repeat of the financial crisis.

In the morning's economic news, existing-home sales jumped 9.4 percent to their highest level in over two years in September. Economists had expected a more modest rise.

But with the first-time homebuyers tax credit about to expire at the end of November, and no clarity on whether it will be extended, and mortgage rates rising, the news failed to lift the homebuilder sector.