Stocks Drop on Bad News From Sun, Alcatel

Stocks opened weakly Wednesday after network computer maker Sun Microsystems Inc. and French telecom gear supplier Alcatel slashed their earnings outlooks and stoked fears the economic downturn will wreak more havoc on corporate profits.

Adding to the early gloom, Morgan Stanley cut its investment ratings on several telecom equipment makers, including Nortel Networks Corp. and JDS Uniphase Corp.. The Wall Street house blamed weakened demand and said there was no evidence of impending recovery.

In early trading Wednesday, the Nasdaq Composite Index  had lost 49 points at 2,125 while the Dow Jones industrial average was down 9  points at 11,029. The broader Standard & Poor's 500 Index was down 5 points.

"It looks like a downward market this morning," said James Volk, co-director of institutional trading at D.A. Davidson and Co. "The problem is not that people are concerned the economy is not going to turn around so much as they are concerned about the length of time it will take for that to happen.''

Sun Microsystems cut its quarterly profit forecast after the closing bell on Tuesday and said sales would be 10 percent or more below Wall Street estimates due to economic weakness in Europe. Sun's stock dropped to $17.23 in pre-market trading from its regular Nasdaq close of $18.67.

Soon after news of failed merger talks between Alcatel and rival Lucent Technologies Inc. spread after the close, France's Alcatel warned operating profit at its telecom business would slip this year. Alcatel said restructuring charges and writedowns would lead to a quarterly net loss of about $2.57 billion at the division. Alcatel fell to $25.60 in pre-open trading from its $27.41 close on the New York Stock Exchange.

Investors had bid the stock market higher since early April amid hopes that worse of the economic downturn had passed. The Federal Reserve has ratcheted down interest rates five times this year to help spark an economic recovery.

But the weak outlook from technology heavyweights is causing investors to rethink their enthusiasm ahead of the period when many companies warn their quarterly results may not meet analysts' expectations. This so-called "preannouncement season" begins in about two weeks.

Uncertain investors will not get any help on Wednesday as to the immediate economic outlook, with no major economic data due. But two Fed officials speaking could further elaborate on the central bank's views on the economy.

Chicago Fed President Michael Moskow was discussing the Fed and the economy before an economic breakfast of the Rotary Club of Wilmette in Northbrook, Ill.

Dallas President Robert McTeer will speak on the outlook for the new economy before the San Antonio Economic and Business Society at 1:00 p.m. EDT. (1700 GMT)

In other news, Morgan Stanley downgraded Nortel, JDS, Tellabs Inc., and Sycamore Networks Inc. to neutral from outperform.

Consumer electronics retailer RadioShack Corp. on Tuesday after the close said its sales were tracking below expectations and its second quarter earnings would fall short of lowered Wall Street forecasts and year-ago results.

Specialty chip maker Altera Corp. will become a top supplier to Nortel Networks Corp., the world's largest telecommunications equipment maker, in a pact to be announced on Wednesday.

Conglomerate Tyco International Ltd. said on Wednesday before the open it will buy medical device maker C.R. Bard Inc. for about $3.2 billion.

Technology stocks fell on Tuesday after Goldman Sachs cropped its earnings forecasts for network computer maker Sun Microsystems Inc. (SUNW.O) and data storage firm EMC Corp. — reawakening fears the soft economy will hit corporate profits.

Blue-chip stocks scraped out a small gain as investors hunted for companies, like pharmaceuticals giant Merck & Co. and cigarette maker Philip Morris Cos. Inc., with more predictable earnings in the economic downturn.