Stocks fail to maintain gains

Investors, shifting their focus from the economy to a possible second-half profit slump, sent technology and small-cap stocks sharply lower today, moving Wall Street toward another losing week.

While investors were cheered by a better-than-expected reading in the Labor Department’s consumer price index, they are increasingly preoccupied with earnings, and so feared that lower prices would translate into lower profits.

“This should be good news. It takes inflation off the table as a concern, at least for now,” said Daniel Portanova, managing director of Gartmore Separate Accounts LLC.

“But I think the bigger question now is the sustainability of the recovery and profits going forward.”

In late afternoon trading, the Dow Jones industrial average slipped just 0.23, nearly flat, to 10,162.93, giving up its 75-point gain from earlier in the session.

Broader stock indicators were also lower. The Standard & Poor’s 500 index was down 2.40, or 0.2%, at 1,104.29, and the tech-heavy Nasdaq composite index fell 20.35, or 1.1%, to 1,892.36.

The closely watched CPI is considered one of the best measures of consumer prices and inflation.

The index rose just 0.3% in June – half the previous month’s rise. “Core” prices, excluding energy and food, rose just 0.1%.

That’s good news for companies, since the Federal Reserve was expected to be less likely to aggressively raise benchmark interest rates, currently at 1.25%, while prices remain relatively steady.

But investors had other concerns on their minds, such as Friday’s spike in oil prices due to a terrorist attack on an Iraqi pipeline.

“First you have the political environment with the election, then you have the concern that profits will slow down significantly going into 2005, and finally, the geopolitical situation abroad is kind of lingering in the background,” said Chris Wolfe, global head of equities for J.P. Morgan Private Bank.

“We may have good earnings, but investors are discounting these other things instead.”

Investors’ uneasy mood led them to look past upbeat news in the battered tech sector, which saw numerous warnings and profit shortcomings in recent weeks.

IBM Corp not only beat Wall Street expectations by four cents per share in the second quarter, but gave a strong positive outlook for the remainder of the year.

Rival Dell Inc also came out with a bullish outlook prior to its Aug 12 earnings report. IBM climbed 85 cents to 84.87, while Dell rose 73 cents to 35.60.

Banking company KeyCorp was down 40 cents at 29.05 despite beating its second-quarter estimates by two cents per share.

The company credited a rise investment and business banking and a decline in bad loans.

Toy maker Hasbro Inc. missed its earnings expectations by two cents per share despite a strong cost-cutting effort, blaming the miss on declines in its Beyblade products. Hasbro was unchanged at 18.00.

Martha Stewart Living Omnimedia Inc. climbed 2.91 to 11.55 after its namesake founder was sentenced to just five months in prison and five months of home confinement for lying about a stock sale unrelated to her company.

Stewart will remain free while she appeals the verdict.

Advancing issues outnumbered decliners by nearly 7 to 6 on the New York Stock Exchange, where volume came to 1.11 billion shares, compared to 1.07 billion at the same point on Thursday.

The Russell 2000 index of smaller companies was down 4.99, or 0.9 percent, at 557.17.

Overseas, Japan’s Nikkei stock average rose 0.25%.

In Europe, Britain’s FTSE 100, Germany’s DAX index and France’s CAC-40 were all flat for the session.