NEW YORK -- U.S. stocks closed mostly lower yesterday after two major banks, Morgan Guaranty Trust Co. and Harris Trust and Savings Bank, lowered their prime lending rates, stirring concern that earnings from banks and other financial-services companies would diminish.
Regional and money-center banks, telephone, and financial-services stocks were among the session's biggest losers.
"With the cut in the prime today, people are worried about a squeeze" on banks' future profits, said Greg Summerville, chief investment officer at Kirr, Marbach & Co. of Columbus, Ind.
The Dow Jones industrial average rose 12.58, to 3,642.31, led by Minnesota Mining & Manufacturing Co., AlliedSignal Inc. and General Motors Corp.
Among broader market measures, the Standard & Poor's 500 Index fell 1.19, to 468.31 after reaching a record high on Friday. The Nasdaq Combined Composite Index snapped a string of five record highs, dropping 4.51, to 782.91.
Almost nine stocks dropped on the New York Stock Exchange for every eight that rose. Volume was active on the Big Board, as about 330 million shares changed hands, down from 358.8 million Friday.
Investor sentiment was also dampened by a rise in long-term interest rates to 5.85 percent from 5.79 percent on Friday. One reason for the increase was the prime rate cut, which aroused concern that banks might start making more loans instead of buying Treasury bonds.
Higher interest rates also lessen the appeal of stocks relative to fixed-income securities.
Bank stocks declined after Morgan Guaranty and Harris Trust lowered their prime rates to 5.5 percent from 6 percent, leading some investors to think bank profits would suffer.
After "huge increases" in bank profits this year, investors have started to ask, " 'Is the momentum in bank earnings about ready to dissipate?,' " said Mr. Summerville of Kirr Marbach.
Last week several smaller banks reported strong earnings that nevertheless were 1 percent to 10 percent below analysts' forecasts, he said.
Bank earnings recently reached "levels associated with peak levels of profitability," Mr. Summerville said. "That game may be just about done."
Yesterday, NationsBank Corp. said third-quarter earnings fell to $1.33 from $1.40 in the year-earlier period, sending its stock down $1.875, to $48.875. Chase Manhattan Corp.'s third-quarter profit rose to $1.33 a share from 94 cents, but its stock dropped $1.75, to $34.125. Signet Banking Corp. fell 62.5 cents, to $33.625, even though third-quarter earnings rose to 80 cents a share from 51 cents.
Merrill Lynch & Co. lowered its investment rating on BankAmerica Corp. and Chase Manhattan to "neutral" from "above average." BankAmerica fell $1.50, to $43.125.
Other bank stocks also tumbled. Well Fargo & Co. skidded $7.125, to $116.625, First Chicago Corp. fell $2, to $45.875, Banc One Corp. dropped $1.875, to $40.25 and Citicorp declined $1.75, to $35.625.
"The prime rate cut will lead to pressure [on bank stocks] over the next couple of sessions," said David Butler, head of equity trading at Kemper Financial Services in Chicago. "And lower rates haven't necessarily helped the economy much in the past," he said.
The blue chip stocks in the Dow Jones industrials were helped in part by a rally in overseas markets and optimism about a European economic recovery, traders said.
Markets in Britain, France and Germany all rose yesterday "on hopes of lower interest rates," said Alan Ackerman, executive vice president at Reich & Co. "The sense is that a stronger economic recovery may be brewing abroad, if low interest rates can mesh with already-lower inflation."
For the largest stocks, "the market definitely has a good head of steam," said Kenneth Ducey, director of trading at BT Brokerage.
One key Dow component, Merck & Co., said third-quarter earnings rose to 62 cents a share from 55 cents last year, topping analysts' forecast of 61 cents a share. Merck rose $1.25, to $32.25.
"For the most part, earnings were better than expected [yesterday], but you did have some" that were disappointing, such as Liz Claiborne Inc. and Puget Power & Light Co., said Edward Collins, executive vice president of institutional trading at Daiwa Securities America.
Liz Claiborne dropped $1.125, to $20. The clothing maker's third-quarter net income fell to 47 cents a share from 77 cents.
Meantime, last week's rally in cable television shares continued to falter as the merger mania, ignited by Bell Atlantic Corp.'s planned $30 billion acquisition of Tele-Communications Inc., faded.
Tele-Communications Inc. fell $1, to $31, MCI Communications Corp. dropped 75 cents, to $28, and Comcast Corp. declined $1.625, to $34.50.