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Dow Sheds Over 1% as Earnings Rally Fizzles

The earnings-fueled rally fizzled Friday as investors began to lock in some profits.

The Dow Jones Industrial Average shed 109.13, or about 1.1 percent, finishing the week at 9,972.18. The S&P 500dropped 1.2 percent.

Even the tech-heavy Nasdaq, which shot out of the gate this morning after blowout numbers 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.

It was a topsy-turvy week, with indexes soaring to new highs for the year on Monday, then swinging into negative territory as the week went on. But the net impact was very little: The Dow finished the week down just 0.2 percent; the Nasdaq shed 0.1 percent and the S&P fell 0.7 percent.

Microsoft was the Dow's best performer this week, up 5.7 percent. Much of that came from today's session after 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 was the week's biggest gainer on the Nasdaq 100, with shares soaring more than 25 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.

Apple wasn't far behind, gaining 9 percent for the week, after the iPhone maker crushed forecasts with its results on Monday. Analysts said they think Apple is going to have a great Christmas and that the stock has further upside potential.

In today's batch of results, American Express and rival credit-card provider Capital One also beat expectations.

Diversfied manufacturer Honeywell posted a smaller-than-expected lossand held its full-year earnings target steady even though itexpects to see sales level off next year.

Oilfield services leader Schlumberger edged past expectations but warned that natural-gas activity would remain weak until late 2010.

The dollar regained some strengthon Friday, sending commodities prices lower. Still, oil finished the week at $80.50 a barreland gold settled at $1,056.40 a troy ounce.

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

The market's slide, despite a 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."

Is the earnings-fueled rally over? What does it mean for next week? Click on the video at left.

Cracks started to show in tech — specifically in the chip sector: The Philadelphia Stock Exchange semiconductor index dropped 3.2 percent after disappointing results from chip maker Broadcom and silicon maker MEMC Electronic Materials .

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 capitaland other measures to avoid a repeat of the financial crisis.

In the day's economic news, existing-home sales jumped 9.4 percentto 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.

And market pros said there are no catalysts due next week to fuel the rally — if anything, some of the news expected next week could actually trip up the rally, like the third-quarter GDP report.

Economists expect to see that the economy grew 3.2 percent in the third quarter, then trail off in the fourth quarter.

Volume was slightly below average today, with 1.28 billion shares changing hands on the New York Stock Exchange. Decliners outpaced advancers, roughly 3 to 1.

On Tap for Next Week:

MONDAY: Chicago Fed report on manufacturing; Earnings from Verizon and Corning
TUESDAY: Case-Shiller home-price index; Conference Board consumer confidence; Ruth Madoff hearing; Earnings from BP, Visa and US Steel
WEDNESDAY: Weekly mortgage applications; durable-goods orders; new-home sales; weekly crude inventories; executive-compensation hearing; Earnings from ConocoPhillips, GlaxoSmithKline and General Dynamics
THURSDAY: 80th anniversary of 1929 market crash; Weekly jobless claims; first look at Q3 GDP; Larry Summers speaks in NYC; Earnings from AstraZeneca, ExxonMobil, P&G, Aetna, Kellogg, Motorola and Sprint Nextel
FRIDAY: Personal income and spending; consumer sentiment; Earnings from Chevron

Send comments to cindy.perman@nbcuni.com.