updated 7/13/2004 9:02:29 AM ET 2004-07-13T13:02:29

An analyst downgrade of the semiconductor sector weighed on technology shares Monday, but large-cap stocks benefited from a late-day rally as investors looked to second-quarter earnings for good news.

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Merrill Lynch cut its rating on the entire sector from “overweight” to “underweight,” citing lower-than-expected demand for both personal computers and corporate hardware. The firm also downgraded Intel Corp. a day before it was due to release its earnings.

While some analysts still expect a strong second quarter, investors were concerned by the continuing stream of earnings warnings and analyst downgrades. However, most of the bearish news was confined to the technology sector, and earnings from banking companies brought large-cap stocks higher.

Yet the news was sufficiently muddled to cause concern on the part of veteran market watchers.

“The market isn’t really responding to good earnings,” said Todd Leone, managing director of equity trading at SG Cowen Securities. “Expectations have been lowered, so I suppose there’s a chance we can see a little bit of a rally as earnings season moves forward, but I really don’t know what to expect.”

At the close, the Dow Jones industrial average, full of large-cap stocks, closed the day up 25.00 points, or 0.2 percent, at 10,238.22 after drifting in negative territory most of the day. The Dow finished higher for the second straight session.

Broader stock indices were mixed. The technology-focused Nasdaq composite index fell 9.41 points, or 0.5 percent, to 1,936.92, while the Standard & Poor’s 500 index rose 1.54 points, or 0.1 percent, to 1,114.35. The Nasdaq has shed 5.4 percent of its value this month.

Trading was light in advance of major earnings reports later in the week, including announcements from Intel, Apple Computer Inc., Johnson & Johnson Co. and Bank of America.

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“Right now, there’s not a lot of impetus for anybody to do anything out there,” said Keith Keenan, vice president of institutional trading at Wall Street Access. “The tech stocks are getting hit hard, and if you see an Intel or IBM come out with a warning or lower earnings, then you could see significant downside. But until then, it’s wait and see.”

The downgrades in semiconductors weighed on the entire technology sector. Intel slipped 33 cents to $26.24, while Novellus Systems, a microprocessor equipment provider, fell $1.33 to $29.72 despite beating Wall Street estimates by 3 cents per share.

The banking sector had a strong showing in its first earnings reports of the quarter. SunTrust Banks Inc. also beat expectations by 3 cents per share on gains in its investment, mortgage and wealth management businesses. SunTrust gained $1.62 to $66.00. M&T Bank Corp. surged $3.70 to $91.60 after it too beat Wall Street expectations by 8 cents per share.

NCR Corp., maker of ATM machines and barcode scanners, provided a rare positive outlook, saying its second quarter earnings could come in as high as 35 cents per share. Analysts had been expecting 18 cents per share. NCR was up $4.79 at $51.81.

Morgan Stanley was up 34 cents at $50.34 after settling a high-profile sexual discrimination lawsuit for $54 million. The Equal Opportunity Employment Commission had accused the investment bank of denying promotions to women in favor of less qualified men.

Advancing issues outnumbered decliners by about 5 to 4 on the New York Stock Exchange, where volume was very light. The Russell 2000 index of smaller companies fell 1.67 points, or 0.3 percent, to 562.06.

Overseas, Japan’s Nikkei stock average rose 1.4 percent. In Europe, Britain’s FTSE 100 closed down 0.8 percent, France’s CAC-40 dropped 0.5 percent for the session, and Germany’s DAX index fell 0.8 percent.

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