Wall Street stocks were volatile on Wednesday after Intel (NASDAQ:INTC)'s disappointing figures drained more confidence from the technology sector.
Materials and energy companies suffered the worst of the selling pressure as crude oil dipped below $90 a barrel with traders betting that a weakened US economy would cause demand for commodities to slump.
Financial stocks bounced back after JPMorgan attracted buyers as it avoided severe subprime-related losses. However Ambac Financial, the bond insurer, fell sharply after it slashed its dividend to shore up capital reserves.
Heavily sold retail names also rallied as discount chains found buyers on hopes that they would better withstand a downturn.
In mid-afternoon the S&P 500 was down only 0.2 per cent at 1,378.89, having earlier fallen 1.2 per cent and crossed a key technical support level - last year's lowest close of 1,370 set on March 5.
The tech-heavy Nasdaq Composite fell 0.6 per cent to 2,3403.47 while the Dow Jones Industrial Average rose 0.2 per cent to 12,524.12.
The Russell 2000 small-cap index also advanced in volatile trading, up 0.8 per cent at 703.31 but remains 17.8 per cent below its July peak.
Large-cap technology stocks sold off after Intel's quarterly profits lagged Wall Street's expectations and its fiscal first quarter revenue outlook disappointed analysts. The shares fell 11.9 per cent to $20 as brokerages cut price targets.
Expectations of bumper earnings growth made tech a stand-out sector in 2007 but the Nasdaq Composite has fallen 9.8 per cent this year with the PHLX semiconductor sector index down 12.2 per cent.
Fourth quarter earnings are expected to hold up well, averaging gains of more than 20 per cent. But Todd Salamone, vice-president of research at Schaeffer's Investment Research, warned that the bulls could set the sector up for a fall.
He said: "The tech sector is expected to have strong earnings growth so it may have more trouble beating estimates."
BEA Systems (NASDAQ:BEAS) was a bright spot, soaring 18.9 per cent to $18.52 after Oracle (NASDAQ:ORCL) agreed to buy the business software company for $8.5bn. Oracle's shares rose 2.5 per cent to $21.84.
The financial sector rebounded after JPMorgan's results revealed much less exposure to subprime damage than some of its rivals. Fourth quarter earnings fell 34 per cent to $2.97bn, worse than expected, as the bank took a $1.3bn writedown on mortgage investments and boosted loan loss provision.
However JPMorgan's problems were small compared with the $18.1bn in writedowns that Citigroup (NYSE:C) revealed on Tuesday. Citi reported a $9.8bn fourth quarter loss and revealed a sharp rise in consumer credit costs. JPMorgan's shares rose 7.1 per cent to $41.92 but Citi fell 2.7 per cent to $26.21. Merrill Lynch, expected to reveal heavy losses on Thursday, rose 4 per cent to $55.15.
Also reporting on Wednesday, Wells Fargo, up 3 per cent at $27.28, said fourth quarter profit fell 38 per cent, in line with expectations.
However, shares in Ambac Financialplunged 33.9 per cent to $13.98 after the bond insurer said it would raise $1bn in new capital and slash its dividend to help preserve its triple-A rating. Ambac also said it expects to take a $5.4bn pre-tax writedown for the fourth quarter. MBIA (NYSE:MBI), a rival, fell 13.6 per cent to $13.86.
Investors took profits in the agribusiness sector, which escaped the worst of the new year sell-off on hopes that the global food price boom would offset a slowing US economy. Monsanto (NYSE:MON) fell 7 per cent to $114.74 and Mosaiclost 7.8 per cent to $93.33.
Energy and materials were the worst performing of the S&P 10 leading sectors as traders priced in waning US demand. National Oilwell Varco (NYSE:NOV) gave up 5.5 per cent to $64.59 while Freeport-McMoRan Copper & Gold fell 6.5 per cent to $88.64.
A comparatively modest increase in consumer price inflation in December, which rose 0.3 per cent compared to expectations of a 0.2 per cent uptick, may leave the door open for the Fed to cut interest rates aggressively, as the futures market now expects.
David Greenlaw, economist at Morgan Stanley, said: "The Fed is now clearly downplaying the emphasis on inflation while raising their focus on the downside risks".
The Federal Reserve's Beige Book regional survey showed the US economy continued to grow at the end of last year.
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