After an early pummeling, stocks managed to bounce back Monday as investors went bargain-hunting despite persistent concerns about a brutal earnings season and the ongoing military operations.

The Dow Jones industrial average edged up 3.46 points, or 0.04 percent, to close at 9,347.62, after falling by as many as 105 points. The technology-dominated Nasdaq Composite Index dropped 7.09 points, or 0.42 percent, to 1,696.31, after reaching lows of nearly 40 points. The broader Standard & Poor's 500 Index dropped 1.67 points, or 0.15 percent, to 1,089.98. 

This week marks the most hectic period for third-quarter earnings, with 180 of the Standard & Poor's 500 companies set to post their results. Analysts expect the biggest drop in earnings in a decade as the U.S. economy struggles to escape recession, according to research firm Thomson Financial/First Call.

"The earnings coming up this week are enough to give any investor or trader pause," said A.C. Moore, chief investment strategist at Dunvegan Associates. "Traders don't take positions in advance of big events -- and the earnings that you are going to see are not going to be good."

Investors are grappling with more than grim earnings. The United States took its military campaign in Afghanistan into a second week, while cases of anthrax contamination in Nevada, New York and Florida have fueled fears of a biological assault on the nation.

"Right now you have earnings season coming out and things will be choppy," said Lance Zipper, managing director of equity trading at Brean Murray & Co. "When people finally see there is going to be a turn in the economy and see tax cuts and interest-rate cuts set in, that's when you will see the market progress. Right now you have to play it day by day."

Profits for S&P 500 Index companies are expected to shrink by 22.4 percent this quarter, making it the worst quarter for profits since the second quarter of 1991, according to research firm Thomson Financial/First Call. 

Technology stocks closed slightly lower after Wall Street houses soured on the makers of chips and chip equipment like PMC-Sierra Inc. and Applied Materials amid fears the battered companies won't rebound any time soon because of the weak global economy.

Cepheid Inc., whose products help detect biological agents, soared more than 13 percent, or $1.06, to $8.84. Detection system maker Nanogen Inc. rose 53 cents to $9.14 and vaccine developer AVANT Immunotherapeutics Inc. rose 18 cents to $5.33. All three added to stellar gains last week as anthrax cases fuel fears of biological warfare.

Several firms surprised investors with upbeat reports.

Among the bright notes was Fannie Mae , up $1.52 at $78.95. The No. 1 U.S. home loan financing company said earnings rose 23 percent, as lower interest rates spurred a wave of mortgage purchases and refinancings and boosted earnings.

Bank of America Corp. , the No. 3 U.S. bank holding company, reported profits that beat the average estimate of analysts polled by Thomson Financial/First Call. Its shares advanced nearly 4.8 percent, or $2.54 to $55.55.

The S&P financial index rose 1.15 percent, reflecting gains in Fannie Mae and other financials, including Dow stocks such as American Express Co. , which rose 90 cents to $30.89.

Bethlehem Steel Corp. a titan of American industry whose steel helped make the United States a world power, sought bankruptcy protection from creditors after failing to overcome cheap steel imports, spiraling costs and a depressed economy. Trading in its stock was halted at $1.20.

Stocks had rallied in the past three weeks, boosted by a handful of upbeat corporate results and hopes that increased government spending and lower interest rates will spur economic growth. But investors are keeping up their guard as the government promises a lengthy war on terrorism after the deadly Sept. 11 attacks.

Investment house J.P Morgan cut its rating on chip makers like PMC-Sierra, saying the sector's stocks were too pricey. Lehman Brothers lowered its ratings on semiconductor equipment makers such as Applied Materials, KLA-Tencor , and Teradyne Inc., saying the timing of recovery for the sector continues to be pushed out.

"There's a little bit of tech weakness and it's related to the downgrades," said Bob Robbins, chief investment strategist, at SunTrust Robinson Humphrey. "But your big winners reflect the interest-rate improvements, with the long-term bond up half a point so you are getting a rally in some of the interest-rate-sensitive areas -- financial services like Fannie Mae, Freddie Mac, savings and loans and banking," he said.

J.P. Morgan cut its rating on five communications chip makers, saying the stocks are overvalued. Applied Micro Circuits Corp. fell $1.47 to $11.63. Xilinx Inc. dropped $1.98 to 29.88. Altera Corp. lost $2.69 to $20.46. PMC-Sierra sank $2.25 to $16.55.

The Philadelphia Stock Exchange semiconductor index tumbled 4.65 percent. Intel Corp., the world's No. 1 maker of computer chips, dropped 64 cents to $24.38, pressuring both the Nasdaq and the Dow ahead of its earnings after Tuesday's close. Applied Materials, downgraded by Lehman Brothers to "market perform" from "strong buy," lost $1.52 to $33.64, or 4.3 percent.

Microsoft Corp. , a Dow stock, rose $1.68 to $58.06. The software giant said it will revamp its MSN online offerings later this month and has signed new deals with major telephone companies to offer high-speed Internet access as the software giant goes head to head with rival AOL Time Warner Inc. .

International Business Machines Corp., the world's largest computer company, rose $1.16 to $102, supporting the blue-chip Dow average. The company is slated to post its results on Tuesday after the close.

Declining issues outnumbered advancers 8 to 7 on the New York Stock Exchange. Volume was 1.01 billion shares, below the 1.33 billion shares traded Friday.

The Russell 2000 index, the barometer of smaller company stocks, rose 1.49 to 430.08. 

Overseas markets were also lower Monday with Japan's Nikkei stock average dropping 1.7 percent. In Europe, Germany's DAX index lost 2.5 percent, Britain's FT-SE 100 declined 1.5 percent, and France's CAC-40 fell 2.8 percent.

Reuters and the Associated Press contributed to this report.