That Sinking-Market Feeling - Industry Trend or Event

Bad news from Intel accelerated the retreat from tech stocks. Get ready for a stormy earnings season.

THE MOOD IN THE MARKET HAS taken a turn for the worse, and earnings are the primary culprit. Investors are awaiting next month's flood of third-quarter results. If Intel is any measure, it doesn't seem as though they'll like what they see.

One by one, tech companies have been warning that they won't meet the Street's expectations for the third quarter. Investors have responded by dumping their tech stocks. As a result, the Nasdaq composite, which rose 16 percent in August, returned nearly all of those gains in the first three weeks of September.

In recent weeks, companies like Net consulting firm Viant, phone carrier Sprint and its wireless unit Sprint PCS have all warned that earnings won't meet Wall Street estimates. The bad news was capped last Thursday with a bombshell from Intel: The chipmaker said revenues would be below expectations due to sluggish sales in Europe. That was all it took to send the Dow Jones Industrial Average tumbling Friday, triggering selling in other tech stocks as well. [See "Market Download' page 82.]

Now Wall Street is bracing for more. "There's a plethora of bad news expected with companies that won't make their numbers," says Art Hogan, chief strategist at Jefferies & Co.

If the stock market was invincible a few months back, it's now just plain vulnerable -- to everything from bad earnings to rising oil prices. As the Internet plays a larger role in the world's economy, Net stocks are more susceptible to old-economy woes. Investors in tech shares bemoan the three E's: energy, euro and earnings. The first two, they say, are finally catching up with the third. Oil prices have tripled in 18 months, raising operating costs for most businesses, while a weak euro is making expansion into Europe tougher. Internet companies that may not be affected by either trend still suffer the psychological fallout from both.

All of this only adds to worries about the future financial health of tech companies. The caution is overtaking the new and old economies alike, with non-Internet companies more reluctant to throw money at the Internet.

Money managers are steeling themselves to the market swings, and many say they expect them to continue. In a market full of nervous investors, volatility tends to breed more volatility.

"The successful managers this year are very active in trading and sell on any strength they see," says Clyde Powers, a VP at Pacific Century Trust, which manages $8 billion in mutual funds. "It used to be that you let your winners run. But now managers say, 'It's up, sell it. That's cash for a future purchase.'"

For the most part, money managers say they're staying put in stocks. Few are cutting the stock allocations in their portfolios. But rather than chasing trends and industries, as many did before the April stock slide, they're focusing on stocks with solid profits and the promise of growth.

Some fund managers say their clients are learning to accept returns that are good, if not great. "Most of them have had a very good five years and understand they can't expect to have a 30 percent [gain] every year," says Bruce Bain, a senior portfolio manager for the Bank of America. "It just isn't possible."

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