HP Drags on Dow; Yahoo Buoys Nasdaq

Stocks closed mixed Tuesday as investors juggled a mixed bag of news including a tepid outlook from Yahoo, HP's bid for EDS and surprising resilience in retail sales.

The Dow Jones Industrial Average fell 0.3 percent, while the S&P 500 index slipped less than one point.

The Nasdaq eked out a gain, led by Yahoo , which jumped 5.2 percent.

Among the Dow's top decliners were: Hewlett-Packard , JPMorgan and General Motors.

Among 10 key S&P sector indexes, financials were the day's biggest decliners, falling 1.5 percent, while energy stocks were the biggest gainers, climbing 1.1 percent.

Offering a glimmer of hope before the market opened was a government report that showed retail sales fell 0.2 percent, as expected, in April but sales excluding autos shot up 0.5 percent. A lot of that strength came from sales of building materials, which gained 1.9 percent, and general merchandise, which rose 0.5 percent.

"Even before the rebate checks hit the mail, households continue spend," Joel Naroff, of Naroff Economic Advisors, wrote in a note to clients. "While much of the rebates will probably go to savings and paying down debt rather than new spending, over the next four to six months, it will help sustain consumer demand to some extent. That could keep us out of a negative quarter."

Separate reports showed import prices jumped 1.8 percent and export prices ticked up 0.3 percent in April; business inventories expanded just 0.1 percent as sales rose 1 percent in March; and, the median value of existing U.S. single-family home sales in metropolitan areas fell 7.7 percent in the first quarter from a year earlier.

Oil blew through its latest ceiling -- and it's only Tuesday -- to nearly $127 a barrel, before settling at $125.80 a barrel. That followed its dizzying $10 ascent last week that saw it briefly cross the $126 mark. The dollar didn't recoil amid oil's ascent, instead it rose broadly against other currencies, helped by the rise in retail sales excluding autos.

Airline stocks were mixed as oil surged but the industry's main trade group said carriers will continue to pack planes this summer even as they reduce capacity to cut costs. The S&P airline index was off 1.6 percent. Among notable gainers were American parent AMR and Continental .

Wal-Mart Outlook Rattles Traders

Discount giant Wal-Mart didn't partake in the retail optimism that came with the government report.

Shares slid 2.4 percent after the retailer reported its profit rose 7 percentbut shares slipped as the company's tepid outlook for the second quarter unnerved traders.

Wal-Mart executives said the outlook for the rest of this year is uncertain and, for the second time in under a week, pointed out that consumers are having a harder time stretching their paychecks and many are running out of money at the end of the month.

Still, Goldman Sachs retail analyst Adrianne Shapira said Wal-Mart's report shows its best positioned to weather the slowdown and said Wal-Mart's conservative projections -- which don't factor in the impact of tax-rebate checks -- were a good thing.

"We believe setting an achievable and potentially beatable bar in today's tough environment is the prudent way to provide guidance," Shapira wrote in a note to clients.

Meanwhile, TJX , which operates the TJ Maxx and Marshalls discount-clothing chains, saw its profit rise nearly 20 percent amid an easy year-earlier comparison and as cash-strapped consumers scooped up the chains' bargains. Sales increased 6 percent to $4.36 billion, while same-store sales rose 3 percent.

The company forecast second-quarter earnings of 40 to 42 cents a share and a 3 percent rise in same-store sales; analysts expect 42 cents a share, according to Reuters Estimates.

Shares of TJX drppped 4.6 percent.

The S&P 500 retail index was off 0.2 percent.

Oppenheimer Down on Financials

Financials got a double whammy -- disappointing earnings from European banks such as Societe Generale and Credit Agricole, and a lowered outlook from a U.S. analyst.

Oppenheimer analyst Meredith Whitney again cut her earnings estimates for some big brokersbased on a weaker outlook for capital markets and sizable estimated revenue reversals due to an accounting rule that lets companies elect to use fair value for certain assets and liabilities.

Whitney cut estimates on: Goldman Sachs, Lehman Brothers, Merrill Lynchand Morgan Stanley .

Traders cheered Yahoo amid news that billionaire investor Carl Icahn might launch a proxy fight at the Internet-search giant. That news came as shareholder Eric Jackson abandoned his plan to make a proxy run at Yahoo to overhaul its board. Icahn could force Yahoo back to the table with Microsoft, though he's going to have to act quickly -- the deadline for a proxy fight is Thursday.

General Motors skidded 2.7 percent after the company's operating chief said, "The U.S. auto industry is definitely in recession" and as the auto maker faces a Thursday deadline for another strike, this one at a metal-stamping plant in Ohio. There's already a strike in progress at a Kansas plant that makes the popular Chevy Malibu.

Hewlett-Packard dropped 5.5 percent after the world's largest personal-computer maker confirmed that it's close to a deal to buy technology outsourcing company Electronic Data Systems for $12 billion to $13 billion.

An EDS acquisition would make HP No. 2 in IT services behind IBM , but IBM shares rose for a second day as analysts said HP was paying a hefty premium for a slow-growing business.

HP reported better-than-expected preliminary quarterly results today and raised its fiscal 2008 outlook, but 2008 won't include any impact from the EDS deal. Going forward, an acquisition of EDS is expected to help more than double HP's services revenue, which amounted to $16.6 billion in fiscal 2007.

Most other hardware stocks -- besides HP -- rose, with notable gains in Apple and Dell .

Staples climbed 2.2 percent after the office-supplies retailer raised its hostile offer for Dutch rival Corporate Express by more than 10 percent, valuing its target at about 1.5 billion euros ($2.3 billion), and said the Dutch business products wholesaler was still refusing to talk.

In other deals news, Italy's Finmeccanica reached a $5.2 billion deal to buy DRS Technologies , securing itself a bigger presence in the growing U.S. defense market.

Abbott Labs jumped 3.1 percent following news that patients who received the medical-device maker's drug-eluting stent had significantly fewer heart attacks than patients with a popular stent made by rival Boston Scientific .

Clear Channel climbed 4.4 percent following news that banks have agreed to settle a financing deal for the radio-station operator at $36 a share.

This Week:

WEDNESDAY: CPI; mortgage applications; crude inventories; Earnings from Freddie Mac, Deere, Macy's and Sony; Fed's Yellen speaks
THURSDAY: Jobless claims; Philly and NY Fed surveys; industrial production; Earnings from Blockbuster, JCPenney, H-P and Kohl's
FRIDAY: Housing starts; consumer sentiment

Send comments to cindy.perman@nbcuni.com.