Wall Street declines on caution ahead of earnings

Negative pre-announcements leave a lackluster profit growth outlook

US stocks tumbled on Monday on caution ahead of corporate results, as mounting negative pre-announcements left a lackluster profit growth outlook.

Wall Street has seen a slow start to the year following a gangbusters 2013. After the S&P 500's jump of almost 30% last year, its forward price-to-earnings ratio is the highest in nearly seven years and investors are weighing the risk of paying such a high premium for earnings that may see growth stall.

Almost 10 out of every 11 earnings pre-announcements for the current earnings season from S&P 500 companies have lowered estimates, according to Thomson Reuters data.

 

Various companies that posted weak earnings or forecasts on Monday, including SodaStream , Lululemon Athletica , Express Inc and Aaron's saw their stocks get hit hard.

"People have moved to the sidelines waiting for earnings to get a little more clarity," said Michael O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.

"Fundamentals are going to have to support gains in the future," he said, pointing to the gradual decline in the stimulus from the Federal Reserve that has pushed US equities as an asset class higher.

After the stellar year stocks had in 2013, "there's no need to be aggressive in 2014 until the companies you care about have reported earnings and given you an all-clear," said O'Rourke.

The Dow Jones industrial average fell 179.11 points or 1.09%, to 16,257.94, the S&P 500 lost 23.17 points or 1.26%, to 1,819.2 and the Nasdaq Composite dropped 61.36 points or 1.47%, to 4,113.304.

Investor anxiety translated into a willingness to pay more for insurance against a drop in the S&P 500. The CBOE volatility Index jumped 9.4% to 13.28 in its largest daily percentage gain in a month. The VIX, however, remains at very low historical levels.

Lululemon, Express Inc, Aaron's and SodaStream gave weak outlooks. Lululemon sank 16.6% to $49.70 while Express slid 4.6% to $18.15; Aaron's lost 6.8% to $27 and SodaStream plunged 26% to $36.94.

But Wendy's outlook was a bright spot, sending shares up 6.4% to $8.98 after the fast-food restaurant chain estimated adjusted quarterly earnings above analysts' expectations.

In merger news, Beam Inc agreed to be acquired by Suntory Holdings Ltd for $16 billion, including debt. Shares of Beam jumped 24.6% to $83.42.

After the closing bell, Google agreed to acquire Nest Labs Inc for $3.2 billion in cash. Google shares edged 0.6% higher in after-market trade.

Volume was above average, with about 7.1 billion shares traded on US exchanges, compared with the 6.44 billion average so far this month, according to data from BATS Global Markets.

Declining stocks outnumbered advancing ones on the NYSE and Nasdaq by a ratio of about 5 to 2.