Stocks drop sharply after the technology bellwether issues a profit warning for the first time in more than 10 years, citing sluggish demand for personal computers.
The Nasdaq composite index closed down 75.18, or almost 3 percent, at 2,653.33, and the Standard & Poor's 500 index dropped 28.78, or 2 percent, to 1,312.15. The Dow Jones industrial average lost 240.03, or 2 percent, to 10,434.96.
For the week, the Nasdaq fell 9 percent from the previous week, while the S&P lost 4 percent, and the Dow slipped about 3 percent. In the Nasdaq's case, the damage could have been much worse. At one point on Friday, it was down more than 130 points before a late rally cut the loss in half.
"The economic slowdown is beginning to reverberate, and no sector is safe," said Larry Wachtel, a market analyst at Prudential, noting that holiday retail sales are slow, and business is moderating in Europe. "It's no longer a tech problem."
The Nasdaq generated a volume of 2.63 billion shares, its third heaviest day ever, as 25 stocks declined for every 14 that advanced. About 16 stocks fell for every 13 gainers on the New York Stock Exchange, which posted heavy volume of 1.55 billion shares.
While numerous tech companies have issued warnings in recent weeks because of sluggish PC sales, Microsoft's announcement highlighted the depth of the slowdown.
"You can't have virtually every person participating in the PC market come out and warn and expect it not to hit Microsoft," said Dave Nadig, a portfolio manager with MetaMarkets.com, which owns Microsoft shares. "I think people would have been stunned if Microsoft came out and said, 'We expect to hit our numbers.'"
In recent weeks, PC makers Compaq Computer, Gateway and Apple Computer have issued warnings, along with chipmakers Intel and Advanced Micro Devices.
Microsoft joined the group Thursday, warning that it expected earnings for the current quarter of 46 cents to 47 cents per share, just shy of the 49 cents per share estimate of analysts surveyed by First Call/Thomson Financial.
The Redmond, Wash.-based software giant also revised downward its 2001 numbers by about 5 percent. For the year, Microsoft expects revenue between $25.2 billion and $25.4 billion and earnings per share between $1.80 and $1.82.
Bill Meehan, the chief market analyst with Cantor Fitzgerald, said he was most troubled by Microsoft's news that corporate PC sales are suffering. He added that Microsoft warning portends bad news for other tech bellwethers.
"Everyone already knows that sales to consumers are garbage," Meehan said. "There are two big questions now: When does IBM warn, and is this a cyclical turn in PCs or the beginning of a change to the post-PC era?"
Deutsche Banc Alex Brown, Merrill Lynch, Robertson Stephens, Lehman Brothers and Dresdner Kleinwort Benson downgraded or cut earnings estimates for Microsoft after the warning.
Merrill Lynch analyst Christopher C. Shilakes reiterated the company's need to "transition itself from a desktop software company to an enterprise solution vendor" given its vulnerability to the PC market.
Shares of Microsoft fell $6.31, or 11 percent, to $49.19 on a volume of about 160 million shares, more than three times the stock's average daily volume, making it the most actively traded stock Friday.
The CNET tech index fell 88.93 to 2,216.18. Decliners overpowered advancers, with 76 of the 97 stocks in the index falling and 21 rising.
Almost all of the 18 sectors tracked by CNET Investor headed lower. Computer data storage makers posted the sharpest drops, falling 7 percent, followed by PC software makers, which lost almost 7 percent.
Earnings misfortunes punished shares of Artesyn Technologies. The maker of communications equipment announced Friday that it expects to post fourth-quarter earnings between 22 cents and 25 cents a share, compared with Wall Street expectations of 39 cents, the consensus estimate of nine analysts polled by First Call/Thomson Financial. Artesyn fell $9.13, or 37 percent, to $15.50.
Analyst comments also drove some tech stocks down. Analyst Erika Klauer at Deutsche Banc Alex Brown cut C-Cube Microsystems to "buy" from "strong buy." The chipmaker fell $5.63, or 32 percent, to $11.75.
EMC dropped $6.50, or about 9 percent, to $65.31. Bear Stearns analyst Andrew Neff downgraded the maker of computer data-storage systems to "attractive" from "buy."
Other storage stocks also fell. Network Appliance declined $3.94 to $65.19, while Brocade Communications Systems lost $8.56, or 4 percent, to $195.
Other technology companies gained ground Friday after strong earnings announcements.
Shares of Oracle climbed $1.06 to $28.56 after announcing earnings that beat analyst expectations by a penny. The company also predicted strong numbers for the upcoming year.
The seller of database software said it earned $623 million, or 11 cents a share, compared with last year's second-quarter profit of $384 million, or 6 cents per share. Revenue grew to $2.7 billion from $2.3 billion in the same period last year.
Adobe Systems rose $5.13, or almost 9 percent, to $62.44 after announcing earnings that beat Wall Street's expectations. The maker of desktop publishing software said it earned 31 cents per share. Analysts polled by First Call anticipated the company would earn 29 cents.
Linux software maker Red Hat dipped 6 cents to $8.63 after posting a net loss of 1 cent a share, a penny better than analyst predictions.
The company said revenue increased 112 percent from $10.5 million in the year-ago quarter to $22.4 million. Its net loss narrowed to $900,000 from $5.4 million.
Chip stocks also suffered. The Philadelphia semiconductor index dropped 13.80, or 2 percent, to 578.78, led by Intel, which lost $2.69 to $32.44.
Despite the down day, investors also heard some positive economic news. The Consumer Price Index, the measure of price inflation at the retail level, rose a seasonally adjusted 0.2 percent, the Labor Department reported Friday.
Excluding the more volatile food and energy sectors, the CPI rose 0.3 percent in November compared with 0.2 percent in October.
The modest gain makes it more likely that the Federal Reserve will shift its so-called bias from guarding against inflation to preventing a stagnant economy when it meets to discuss interest rate policy on Dec. 19. The change in outlook also positions the Fed to cut rates at later meetings.