Stocks fell on Tuesday after disappointing quarterly results from Procter & Gamble and U.S. Steel hurt confidence in the earnings outlook, while a Wall Street Journal article raised doubt the Federal Reserve would lower interest rates this week.
Stocks extended their decline after a report showed consumer confidence declined in October to a two-year low, raising doubt about the upcoming holiday shopping season.
Shares of Merrill Lynch fell after the investment bank ousted Chief Executive Stan O'Neal just days after reporting the biggest quarterly loss in the company's history. No successor was named.
U.S. Steel posted a 35 percent slide in third-quarter profit. The company also warned of an earnings decline in the fourth quarter. Procter & Gamble reported higher profit but earnings were in line with analysts' forecasts.
There's a growing understanding it's all on the economy and not on the Fed, said Joseph Battipaglia, market strategist at Stifel Nicolaus in Philadelphia. The economic outlook going into '08 is soft, and there's a strong chance we'll have a recession next year. In the first stages of a recession, the stock market underperforms.
The Dow Jones industrial average was down 40.15 points, or 0.29 percent, at 13,830.11. The Standard & Poor's 500 Index was down 6.67 points, or 0.43 percent, at 1,534.31. The Nasdaq Composite Index was down 2.45 points, or 0.09 percent, at 2,814.99.
Stocks have risen recently, in part, on a widely held view the Fed would cut rates on Wednesday by at least a quarter percentage point. But Greg Ip, the newspaper's Fed watcher, wrote on Tuesday the policy makers are not considering a half-point cut and that a quarter-point cut is no sure thing.
Nasdaq's declines were capped by gains in Apple and Google, as they have been over the past few weeks.
Apple said it sold more than 2 million copies of its latest operating system, sending its shares up 1.4 percent to $187.63. Google stock was up 2.7 percent to $697.66 after the Wall Street Journal reported the company is expected to announce Google-powered phones may be on the market by mid-2008.
Merrill shares fell 2.6 percent to $65.70 on the NYSE.
P&G stock dropped 4 percent to $68.97 and U.S. Steel declined 7.1 percent to $104.54.
The Conference Board index of consumer sentiment fell below economists' expectations.
The Fed's Open Market Committee is scheduled to begin a two-day policy meeting later on Tuesday, with a decision expected on Wednesday afternoon.