Stocks Plunge After Fed Cut

NEW YORK – Stocks tumbled to their lowest levels since early April on Tuesday after the Federal Reserve cut a widely-expected quarter of a point off key interest rates in its bid to spur the lagging U.S. economy.

The central bank brought its key federal funds interest rates, which is what banks charge each other for overnight lending, down to 3.50 percent -- its lowest level since March 1994 -- from 3.75 percent.

In explaining its latest rate move, the Fed said in a statement: "Household demand has been sustained, but business profits and capital spending continue to weaken and growth abroad is slowing, weighing on the U.S. economy."

The pessimistic comment started a slide which quickly snowballed into an across-the-board tumble.

The Dow Jones industrial average lost 145.93 points to end the day at 10,174.14, while the Nasdaq composite index lost 50.04 to 1,831.31. The Standard & Poor's 500 index dropped 14.14 to 1,157.27.

``They [the Fed] cited future weakness,'' said Peter J. Blatchford, head of proprietary trading at brokerage Miller Tabak & Co. ''The market would have rather seen sort of a shift to neutral, maybe signaling the end of the rate cuts, but (the Fed) saying that they are still on alert (shows) that the economic weakness isn't over yet.''

In the past, a Fed easing was nearly guaranteed to give the market a jolt, because investors anticipated lower rates would boost corporate profits. But earnings this year are expected to be down 9.6 percent -- their most dramatic drop in a decade -- according to earnings tracking firm Thomson Financial/First Call -- with few signs they are ready to emerge from their slump.

Fears over dwindling corporate profits have caused the broad S&P 500 to post its worst sixth-month performance from the start of a Fed easing cycle in some 50 years, according to research firm MarketHistory.com. The S&P has sunk 9.8 percent, the Nasdaq has lost 20.1 percent, and the Dow has slipped 4.4 percent since the Fed began its rate cuts on Jan. 3.

One of the stock market's best-known bulls, Goldman Sachs chief investment strategist Abby Joseph Cohen, tempered her outlook for the market, but still foresees a 28 percent rise in the S&P 500 index for the rest of the year. Cohen lowered her year-end target for the S&P 500 index to 1,500 from 1,550.

Retailer stocks declined after youth-oriented apparel chain American Eagle and discount chain Target gave tepid profit forecasts.

American Eagle announced a more than five-fold increase in profits, but said it saw earnings per share for the third quarter at the low end of analysts' estimates. The company's stock sank $9.06, or 28 percent, to $23.21.

Target said its earnings rose 5 percent from a year ago, but a tepid forecast for third-quarter earnings sent shares lower. Target fell $1.74 to $35.36.

Electronics testing equipment maker Agilent Technologies Inc. was up 36 cents at $26.45, rebounding after taking a hit the wake of news it would slash 9 percent of its work force as it struggles to restructure its business amid persistently soft demand.

Staples Inc., the No. 2 U.S. office products retailer, fell 52 cents to $15.70 after its profits sank.

Declining issues led advancers 3 to 2 on the New York Stock Exchange. Volume came to 1.01 billion shares, compared with 886.15 million shares Monday.

The Russell 2000 index slipped 6.63 to 472.24.

Overseas, Japan's Nikkei stock average rose 0.2 percent. In Europe, Germany's DAX index rose 0.1 percent, Britain's FT-SE 100 advanced nearly 1.4 percent, and France's CAC-40 gained 0.9 percent.

Reuters and the Associated Press contributed to this report.