Investors Torn Between Turnaround Hopes and Earning Fears

Technology stocks edged higher while the Dow slipped Thursday as investors juggled hopes for an economic turnaround this year and recurrent worries that shares are overpriced.

The Dow Jones industrial average fell 26.23 points, or 0.26 percent, to end at 10,067.86, according to the latest data, while the Nasdaq composite inched up 2.35 points, or 0.11 percent, to 2,047.24. The broad Standard & Poor's 500 index added 1.41 points, or 0.12 percent, to 1,156.55.

Tech stocks mostly outperformed blue chips on expectation technology companies will show the fastest growth once the economy perks up.

"A recovery is built in and where are we going to go from here?" said Gary Dugan, global market strategist for asset management firm JP Morgan Fleming. "People have got some good profits to take. Unless companies can conjure up some better surprises, people will just sit on their cash."

Upbeat sales news from Wal-Mart Stores Inc. and Gap Inc. boosted some retailers, but gains were slight as Wall Street fretted stocks are too expensive after soaring from 3-year lows hit on Sept. 21. A New Year's rally has spurred an almost 5 percent gain in tech stocks.

Stocks in the Standard & Poor's 500 index are selling for 22 times their forecast earnings this year -- about the same multiple as at the height of the bull market in March 2000, according to research firm Thomson Financial/First Call.

"Prices certainly have gotten ahead of earnings," said John Davidson, president and chief executive officer at PartnerRe Asset Management, which oversees $4 billion. "The fourth-quarter rally we had late last year and the rebound from the lows of 2001 were a positive ... but now people are going to wait to see that earnings come through and the economy turns."

Investment bank Salomon Smith Barney downgraded U.S. equities to "underweight" from "overweight," saying Europe and emerging markets offer better value and have similar or more upside.

Shares in Dow Chemical Co. the No. 2 U.S. chemical company, fell nearly 9 percent, or $2.94 to $31.06, on investor fears concerning the company's asbestos liabilities.

Ford Motor Co. slumped $1.02, or more than 6 percent, to $15.29. The company's earnings will suffer because its ability to cut costs will be limited by contracts with the United Auto Workers union, investment bank UBS Warburg said.

Ford is expected to announce a massive restructuring plan that could include the shuttering of some vehicle assembly plants and thousands of job cuts.

Wall Street scanned retail sales for clues on the health of consumer spending, which accounts for two-thirds of economic activity. According to sales data from 84 retailers compiled by Bank of Tokyo-Mitsubishi, same-store sales rose 2.3 percent, surpassing the bank's forecast for growth of 1.5 percent. The S&P's retail index advanced 0.86 percent.

"The fact that those numbers came through fine underscores that things aren't as bad as people think they are," said John O'Donoghue, co-head of listed stock trading at Credit Suisse First Boston. Still, "there's no real impetus to be taking leaps and bounds to the upside,"

Retailers Wal-Mart Stores Inc. and Gap Inc. offered some brighter news, saying shoppers seeking last-minute gifts and bargains helped cushion retailers during a tough holiday season.

Gap rallied $1.83 to $16.35 and was the second-most active stock on the New York Stock Exchange after saying sales fell 11 percent in December, which was less than expected.

Wal-Mart, the world's largest retailer, edged up 60 cents to $57. The Dow component said sales rose 8 percent in December, topping its forecast.

Kmart Corp., the No. 2 U.S. discount chain behind Wal-Mart, dropped 60 cents to $4.20. The company said it does not expect earnings for its fiscal year to meet analysts' forecasts and said it was in discussions with its lenders regarding existing and supplemental financing.

Fallen energy trader Enron Corp. dropped 12 cents, or more than 15 percent, to 67 cents. The Justice Department said it had opened a criminal investigation of Enron, as the controversy over the energy giant's collapse widened.

Rite Aid Corp., the No. 3 U.S. drugstore chain, fell $1.08 to $3.01 and was the most heavily traded share on the Big Board. The company reported a wider-than-expected loss.

The U.S. labor situation appeared to improve last week, with the government reporting a bigger-than-expected falloff in jobless workers applying for state unemployment aid.

The number of workers filing initial jobless claims fell by 56,000 to a seasonally adjusted 395,000 for the week ended Jan. 5 from a revised 451,000 a week earlier, the Labor Department said.

Declining issues led advancers 5 to 4 on the New York Stock Exchange. Volume came to nearly 1.01 billion shares, compared with 1.09 billion at the same point Wednesday.

The Russell 2000 index advanced 0.29 to 495.03.

Overseas, Japan's Nikkei stock average fell 1.2 percent. In Europe, Germany's DAX index lost 1.3 percent, Britain's FT-SE 100 slipped 1.1 percent, and France's CAC-40 dropped 1.6 percent.

Reuters and the Associated Press contributed to this report.