U.S. stocks fell on Thursday on mounting concerns that credit market upheaval will erode bank profits and hold back consumer spending, but optimism about corporate investment helped lift technology shares.
Trading volume was light and volatility once again high a day before a key speech from Federal Reserve Chairman Ben Bernanke that could shed light on prospects for a cut in the Fed's benchmark interest rate.
A big catalyst for Thursday's drop came from Lehman Brothers, which slashed earnings estimates on its investment banking peers, warning about the impact of faltering credit markets on profits. The AMEX Securities Broker Dealer index fell 0.7 percent.
A Merrill Lynch downgrade of Wal-Mart Stores Inc to sell exacerbated worries about the effect of the credit crisis on the consumer. Shares of the world's largest retailer fell 2 percent to $43.32.
People continue to focus on the big question: 'how widespread are these credit problems?' And then you have high-profile analysts reminding the market that there are probably bad earnings from the financials coming in the back half of the year because of write-downs, said Eric Kuby, chief investment officer at North Star Investment Management Corp. in Chicago.
The Dow Jones industrial average was down 50.56 points, or 0.38 percent, at 13,238.73. The Standard & Poor's 500 Index was down 6.12 points, or 0.42 percent, at 1,457.64. The Nasdaq Composite Index was up 2.14 points, or 0.08 percent, at 2,565.30.
The Dow and the S&P had seesawed earlier, dropping first on a report toxic gas had been discovered in a United Nations building in New York but reversing the losses when U.N. officials said there was no danger.
Apple Inc. led the Nasdaq's advance with a gain of 1.6 percent to $136.25, rising for a second day on expectations for the launch of its latest iPod music players.
A bright spot on the economic front was news strong business investment and higher exports drove the U.S. economy ahead at a robust 4 percent annual rate in the second quarter before the credit market troubles that are expected to brake growth ahead.
Shares of Goldman Sachs, Bear Stearns, Morgan Stanley and Merrill Lynch fell after Lehman Brothers cut its price target on the banks, saying their third-quarter earnings would be hurt by losses in the credit and asset-backed mortgage markets.
Goldman Sachs' shares fell 1.3 percent to $171.38, Morgan Stanley fell 1.7 percent to $60.16, Bear Stearns slipped 0.4 percent to $106.70, while Merrill Lynch dropped 1.3 percent to $72.18. Lehman's move follows Goldman Sachs and Merrill Lynch, which also downgraded major investment banks this week.
In the latest negative headlines on housing, the Office of Federal Housing Enterprise Oversight said U.S. average house prices in the second quarter showed the slowest price appreciation in a decade. The Dow Jones home builders index fell 1.1 percent.
H&R Block Inc shares fell 1.7 percent to $19.84 after it said the sale of its subprime lending unit may fall apart as credit markets deteriorate and after its quarterly loss more than doubled.
Shares of Freddie Mac, the second-largest U.S. source of home loan funding, fell 5 percent to $60.07 after reporting second-quarter net income fell 45 percent from a year earlier as more borrowers defaulted on their loans.
It was not only Wal-Mart's downgrade that put retailers in the spotlight. Sears Holdings Corp shares fell 2.6 percent to $141.83 after it posted a 40 percent decline in second-quarter profit as sales fell and it marked down prices.
Trading was anemic on the NYSE, with about 1.25 billion shares changing hands, far short of last year's estimated daily average of 1.84 billion, while on Nasdaq, about 1.7 billion shares traded, also well below last year's daily average of 2.02 billion.
Decliners outnumbered gainers by a ratio of about 19 to 15 on the NYSE and by 17 to 12 on Nasdaq.