NEW YORK (Reuters) - U.S. stocks fell on Tuesday after disappointing results from Wells Fargo & Co (WFC.N) and other big banks combined with soaring oil prices to sour the outlook for corporate profits.
Oil thundered above $88 a barrel for the first time on supply worries as tensions rose between Turkey and Kurdish separatists in northern Iraq. Investors worried that high energy prices could cut into consumer and business spending.
Shares of Wells Fargo and KeyCorp (KEY.N) dropped after the banks' profits fell short of Wall Street's estimates as credit losses took a toll, a day after Citigroup Inc (C.N)reported a 57 percent tumble in third-quarter profit.
"We're coming into the reality of earnings season and for many sectors of the market such as financial and consumer, that's kind of scary," said Emanuel Weintraub, managing director at Integre Advisors in New York.
"The fact that earnings have been disappointing so far, has also made investors focus on the negative of higher oil prices, which in the past few months, it has often shrugged off."
The Dow Jones industrial average .DJI fell 71.86 points, or 0.51 percent, to end at 13,912.94. The Standard & Poor's 500 Index .SPX slid 10.18 points, or 0.66 percent, to 1,538.54. The Nasdaq Composite Index .IXIC dropped 16.14 points, or 0.58 percent, to 2,763.91.
YAHOO! AND INTEL BEAT STREET
Two technology bellwethers posting forecast-topping results after the bell will likely give the major U.S. stock indexes a lift in Wednesday's trade.
Web search company Yahoo (YHOO.O) shares rose 5.6 percent in extended trading, while chip maker Intel (INTC.O) climbed 5 percent.
Nasdaq futures NDc1 and S&P 500 futures shot higher after the results.
But shares of International Business Machines (IBM.N), the biggest technology services company, dropped 1.9 percent after the bell, after its earnings met expectations.
Richard Williams, senior analyst at Summit Analytic Partners in New Jersey said that given the benefit from the weak dollar, the IBM results were "just not going to cut it."
HOUSING WORST SINCE WORLD WAR II
The bank earnings and comments from Federal Reserve Chairman Ben Bernanke on Monday and Treasury Secretary Henry Paulson on Tuesday dashed investors' hopes for a fast resolution of the global credit problems.
Paulson and Bernanke added their voices to those warning that the housing slump will likely hurt the U.S. economy for some time.
And Caterpillar Inc (CAT.N) Chief Executive James Owens said the downturn in the U.S. housing market is the worst it has been since World War II, adding that the sector is likely to weaken further next year.
Shares of home builders took a hit, with the Dow Jones home builder index .DJUSHB falling 3.5 percent. D.R. Horton Inc (DHI.N), the largest U.S. home builder, fell 5.3 percent to $12.86 after it said quarterly net orders for new homes slid 39 percent in another sign of the housing slump.
Wells Fargo posted the smallest quarterly profit gain in more than six years, sending its shares down 3.9 percent to $34.55. KeyCorp, a large Midwestern bank, posted a third-quarter profit that fell short of estimates, spurring a 5.9 percent slide in its stock to $30.44.
Citigroup's shares fell 3.1 percent to $44.79, as the Philadelphia KBW Bank index .BKX shed 2.1 percent.
U.S. oil futures CLc1 rose 1.7 percent, or $1.48, to settle at $87.61 a barrel after earlier setting a record of $88.20, triggering a decline in shares of retailers and industrial conglomerates who are particularly sensitive to a high energy costs.
Shares of Wal-Mart Stores Inc (WMT.N), the world's biggest retailer, dropped 1.3 percent to $45.86 on the NYSE, while the S&P retail index slid 1.1 percent.
Caterpillar (CAT.N) dropped 1.4 percent to $77.75.
General Motors Corp (GM.N) fell 4.1 percent to $39.41 after Bear Stearns downgraded the No. 1 U.S. automaker, saying the earnings and cash flow gains for 2008 to 2009 from GM's new union contract will be less than expected.
A quarterly profit shortfall from Ericsson, the mobile phone network maker,(ERICb.ST)(ERIC.O), soured sentiment about the communications equipment sector.
Ericsson's U.S.-listed shares sank 23.5 percent to $31.33 and led the Nasdaq 100's .NDX list of biggest losers. Cisco Systems (CSCO.O) dropped 1.5 percent to $32.29 and ranked second among the major decliners dragging on the Nasdaq.
Trading was moderate on the NYSE, with about 1.29 billion shares changing hands, below last year's estimated daily average of 1.84 billion. But on the Nasdaq, about 2.13 billion shares traded, ahead of last year's daily average of 2.02 billion.
Declining stocks outnumbered advancers by a ratio of about 3 to 1 on the NYSE and by 2 to 1 on Nasdaq.