Tech Stocks Hurt by Cisco Forecast

NEW YORK – Technology stocks tumbled Wednesday on a disappointing forecast from Cisco Systems Corp. (CSCO), but blue chips managed to break even as investors bought more stable pharmaceutical and consumer shares.

The Nasdaq Composite Index (search) finished down 26.28 points, or 1.45 percent, at 1,782.42. The Dow Jones industrial average (search) was down 6.35 points, or 0.06 percent, at 9,938.32. The Standard & Poor's 500 Index (search) fell 3.25 points, or 0.30 percent, at 1,075.79.

Wednesday's losses were in contrast to steep gains on Tuesday after positive comments from the Federal Reserve (search) on the economy.

A sales warning from Kulicke & Soffa Industries Inc. (KLIC) and National Semiconductor Corp. (NSM), which was downgraded by brokerage firm Smith Barney, added to the pressure on the technology sector. The sell-off erased much of the previous session's gains on the Nasdaq composite index and led the rest of the market lower, although blue chips regained most of their lost ground in late bargain-hunting.

Volatility in oil prices, spurred by concerns about tightening supply, contributed to the declines. Crude futures fell after Saudi Arabia signaled it could raise its production output if necessary, but resumed their climb later in the session, closing up 28 cents at $44.80 — just 4 cents off their record high.

"We keep coming back to the same concern: crude oil prices," said Ken Tower, chief market strategist for Schwab's CyberTrader. "Until there is some sign that crude oil is starting to come down ... and stabilize, I think everybody is going to remain very uncertain about how much of a slow down in growth we will have."

Cisco, the world's largest maker of equipment that directs Internet and other network traffic, reported a surge in quarterly profit on Tuesday but said inventories rose and that customers were becoming more cautious. It also forecast sales for the current quarter that were short of Wall Street's expectations.

"It shocked the market back into the same negative feelings that we had last week - that the economic data is weaker than expected and the economy is not growing enough to support the earnings growth," said John Caldwell, chief investment strategist at McDonald Financial Group.

U.S. stocks posted their biggest one-day gains in two months on Tuesday after the Federal Reserve said the economy, although stung by energy costs, was still poised for growth. The Fed's comments accompanied its widely anticipated 25 basis-point interest rate hike to 1.5 percent.

Volatility in oil prices also contributed to investor worries, though crude futures posted declines after Saudi Arabia signaled it could raise its production output if necessary. Oil was down 12 cents at $44.40.

"We keep coming back to the same concern: crude oil prices," said Ken Tower, chief market strategist for Schwab's CyberTrader. "Until there is some sign that crude oil is starting to come down ... and stabilize, I think everybody is going to remain very uncertain about how much of a slow down in growth we will have."

A recent deceleration in earnings, combined with ongoing concern about climbing oil prices, inflation, potential terrorist attacks and the upcoming election, has provoked a good deal of pessimism in the market. While the unknowns are worrying, most analysts agree the market's underlying fundamentals remain strong.

Blue chips pared steeper losses earlier in the session as investors sought out seemingly safer names.

"Among the pharmaceuticals and consumer stocks, you're seeing money starting to flow back in. Money is moving out of technology into more stable areas," said John O'Donoghue, CSFB's managing director of listed trading.

Pfizer Inc. (PFE) was up 46 cents at $31.77, Johnson & Johnson $1.01 higher at $56.00 and Coca-Cola Co. 99 cents higher at $44.45.

Drug companies also become more attractive when interest rates rose because patients continue to use their products despite higher prices and tighter household budgets.

Among decliners, Cisco dropped $2.17, or more than 10 percent, to $18.29. It was the biggest drag on the Nasdaq and the S&P 500. Downgrades from JP Morgan and Merrill Lynch contributed to the stock's slide.

National Semiconductor fell after forecasting a drop in quarterly revenue due to lower-than-expected demand. It lost $2.22, or 14 percent, to $13.48.

Kulicke & Soffa, which makes equipment used to assemble microchips, fell $1.76, or 25 percent, to $5.26 after saying quarterly revenue will be short of its prior forecast by as much as 31 percent.

The Walt Disney Co. (DIS) was down 66 cents at $21.78, despite reporting earnings that beat expectations, with a jump in profits on higher theme park attendance and growth in its cable networks. Former board member Roy Disney, who resigned last year in a bid to oust chief executive Michael Eisner, questioned the prospect for future growth, however.

Toys "R" Us Inc. (TOY) was down 27 cents at $16.15 after releasing details of a planned restructuring, which is likely to include the spinoff of its baby product division.

Trading was active, with 1.41 billion shares changing hands on the New York Stock Exchange, the same as the 1.4 billion daily average last year. About 1.78 billion shares were traded on Nasdaq, above the 1.69 billion daily average last year. Decliners outnumbered advancers on the NYSE by about 3 to 2, and about 2 to 1 on Nasdaq.

The Russell 2000 index, which tracks smaller company stocks, was down 3.20, or 0.6 percent, at 526.63.

Overseas, Japan's Nikkei stock average finished 0.9 percent higher Wednesday. In Europe, France's CAC-40 and Britain's FTSE 100 each closed down 0.9 percent, while Germany's DAX index lost 1.1 percent.

Reuters and the Associated Press contributed to this report.