After a surprise half-point cut in short-term interest rates this week, investors must now face the reality of diminished earnings and sales for some of the tech sector’s biggest names. Yahoo!, Motorola and Ariba all report earnings next week.
For the week, the Dow Jones industrial average fell 125 points to 10,662.01 while the Nasdaq composite fell 63 points to finish at 2,408.06.
After analysts downgraded several software and chip stocks Tuesday, the Nasdaq started 2001 much the way it ended 2000.
But the markets exploded for record gains Wednesday after the Federal Reserve Board delivered a surprise cut to short-term interest rates, knocking off half a percentage point.
“The markets needed this, but this was totally unexpected,” said Barry Hyman, chief investment strategist for Weatherly Securities, on Wednesday. “The swiftness and the size clearly indicate the Fed is concerned about the economy. It is a catalyst and it is a catalyst that is going to stick. The important thing to believe is the Fed is on a scheme of lower interest rates for the first half of this year.”
The Fed also said it was prepared to cut rates further if needed to prevent the economy from slowing too much. The move, which came four weeks ahead of the year's first scheduled meeting of the rate-setting Federal Open Market Committee, takes the fed funds overnight bank lending rate to 6 percent.
It also cut the discount rate by a quarter point to 5.75 percent, a symbolic move that shows the Fed’s determined to protect the economy from any further deterioration.
Wednesday’s euphoria, which included a record 325-point surge for the Nasdaq, evaporated later in the week as profit warnings and downgrades took their toll.
Looking ahead to next week, investors will be anxious to see just how poorly Internet, software and semiconductor manufacturing firms did in their latest quarter.
Fred Moran, an analyst at Jefferies & Co., said he expects Yahoo! to meet the estimate on sales of $313 million, a 54 percent jump from the year-ago quarter. He maintains a “buy” rating on the stock and long-term price target of $45 a share.
“We believe Yahoo! should deliver decent fourth quarter results, although any upside to results has been diminished by a challenging macro advertising environment, exacerbated by the evaporation of dot-com advertising,” he said in the release.
Analysts on average are predicting fourth-quarter sales of $315 million in the quarter with gross profit margins somewhere between 85 percent to 87 percent.
Last quarter, Yahoo! topped analysts’ estimates when it posted a profit of $81.1 million, or 13 cents a share, on sales of $295.5.
The stock skidded to a 52-week low of $25.06 in December.
Company official now expect sales around $10 billion and earnings of 15 cents a share, down from the 27 cents a share it predicted in October. Analysts originally forecast a profit of 37 cents a share.
The company said its "personal communications" unit, which makes wireless phones, hasn't been as profitable as expected and that it also hasn't achieved cost reductions in wireless phone production due to bad timing and a backlog of inventory.
Motorola added that a slowdown in the semiconductor industry is denting the sales and operating profits for its chip unit.
Last quarter, Motorola met analysts’ estimates when it pocketed $598 million, or 26 cents a share, on sales of $9.5 billion.
Analysts are expecting total sales just north of $35 million.
First Call Corp. consensus expects it to earn 2 cents a share in the quarter.
Last time around, Ariba basically broke even, losing $1.1 million on sales of $134.9 million.
It’s expected to record first-quarter sales of around $155 million.