msnbc.com staff and news service reports
updated 4/29/2005 7:14:58 AM ET 2005-04-29T11:14:58

Stocks fell sharply Thursday despite robust earnings from big industrial companies as first-quarter economic growth came in below expectations , raising yet more questions about the strength of the economy.

Major Market Indices

With more than 50 companies in the Standard & Poor’s 500 reporting results, it was one of the busiest days of the quarterly earnings season. But investors were distracted from mostly positive corporate news by the disappointing report on gross domestic product, which grew at a 3.1 percent rate in the first quarter, the slowest pace in two years. The figure was slightly less than the 3.5 percent expected by many analysts.

The report also showed faster growth in core consumer prices, aggravating inflation worries and renewing concern that Federal Reserve policy-makers will take a more aggressive posture on rates when they meet next week.

“I think the GDP numbers have kept inflation on the front burner, and that’s obviously weighing on the day’s action,” said Bryan Piskorowski, market analyst at Wachovia Securities. “But bonds are not reacting super-badly to these numbers. We’re at a pivotal point right now. What the bond market is trying to do is determine at what point do we see light at end of the tunnel with regard to the Fed? So we’re taking some solace in that.”

The Dow Jones industrial average fell more than 120 points or about 1.2 percent. Broader gauges also were sharply lower.

The disappointing GDP report came a day after the Commerce Department reported a sharp drop in orders for durable goods, the latest evidence of an oil-induced "soft patch" slowing the economy that has pushed the stock market down to near its lowest levels of the year.

"It's starting to develop what some people might interpret as a pattern," said Art Hogan, chief bond market analyst for Jefferies & Co. "If you're afraid you need a new roof and you find two leaks, you may need a new roof."

Hogan said investors are growing nervous that the "soft patch" might develop into a full-fledged economic slowdown and eat away at corporate earnings.

Quincy Krosby, chief investment strategist for The Hartford insurance company, said she and other economists have been warning for some time that the economy is likely to slow down.

"The problem is, when it actually starts to happen people are taken aback," she said. "We are in that part of the Fed hike cycle here markets typically get nervous."

The Fed began raising short-term interest rates in June 2004 and is expected to raise benchmark levels another quarter-point Tuesday. Ironically, a strong GDP report also might have hurt the stock market Thursday because investors would have feared a more aggressive rate-hike response from the Fed, Krosby said.

Bond prices were modestly higher on the latest report of economic weakness, with the yield on the 10-year note slipping to 4.21 percent, from 4.23 percent late Wednesday.

Hogan said the GDP news was driving a broad market sell-off, overshadowing the dozens of earnings reports.

Exxon Mobil Corp. skidded $1.63 to $56.75 after the world’s largest publicly traded oil company reported a 44 percent surge in earnings over the same period last year, due to strong crude and natural gas prices. The company's earnings missed the consensus estimate of analysts surveyed by Thomson Financial by 5 cents a share.

Procter & Gamble gained $1.57 to $55.10 after the nation’s largest household products maker reported strong earnings driven by volume increases across all business units, and raised its forecast for the rest of 2005.

Defense giant Northrop Grumman also topped expectations with robust first quarter earnings thanks to solid sales growth, higher operating profit across all segments and lower corporate and interest expenses. The company's stock rose 93 cents to $54.43.

Decliners outnumbered advancers by about 2 to 1 on the New York Stock Exchange. Overseas, Japan’s Nikkei stock average rose 0.03 percent. In afternoon trading in Europe, France’s CAC-40 slid 0.41 percent, Britain’s FTSE 100 fell 0.02 percent and Germany’s DAX index was down 0.26 percent.

The Associated Press contributed to this story.

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