NEW YORK -- U.S. stocks fell yesterday as two government reports renewed concern the economy won't grow enough to keep corporate profits surging. Oil, drug and tobacco shares paced the decline, outweighing a rally in semiconductor stocks.
The government said retail sales fell an unexpected 0.1 percent in July -- after two consecutive gains -- while the prices consumers pay for goods and services rose just 0.2 percent last month.
While some investors initially read the reports to mean inflation is contained, the optimism soon gave way to concern that a weak economy will hamper future earnings. The bond market's slump in the face of subdued inflation also depressed stocks, investors said.
"The market is wrestling with how much corporate profit growth can we expect between now and the middle of 1996, given the pace of economic growth," said Jim Weiss, chief investment officer of IDS Equity Advisors, which manages $6 billion in U.S. equities. "The inflation numbers are all good news in the sense you don't have to worry about an overheating economy, but you do have to worry about what profits will look like."
The Dow Jones industrial average fell for the third straight day, dropping 25.36 to 4,618.30. Philip Morris Cos., Walt Disney Co. and International Paper Co. led the decline. The average was down 66.16 points for the week.
Philip Morris fell $1.50, to $72, in the wake of the U.S. government's effort to regulate tobacco as a drug. Shares of other cigarette makers also fell. RJR Nabisco Holdings Corp. fell 75 cents, to $27.125; Loews Corp. slid $2.625, to $124.75; and B.A.T Industries PLC's American depositary receipts, each representing two common shares, eased 75 cents, to $16.
Disney fell $1.375, to $56.50, amid concern that cost savings from the proposed merger with Capital Cities/ABC Inc. won't be realized for a few years, analysts said.
The broader Standard & Poor's 500 index also dropped for the third consecutive day, falling 2.34 to 555.11. The Nasdaq composite index recovered to close up 3.50 at 1,004.11. It fell 4.43 Thursday, ending a four-day rally.
The Russell 2000 index fell 0.16, to 299.08; the American Stock Exchange market value index fell 2.19, to 521.80; and the Wilshire 5000 index fell 17.09, to 5510.74.
Oil and drug shares also weakened, offsetting gains in computer shares.
Oil shares fell amid concern that third-quarter earnings won't be as strong as the second-quarter's because of weak oil and natural gas prices and poor refining profit margins, traders said. Exxon Corp. fell 62.5 cents, to $69.375, and Amoco Corp. shed 25 cents, to $63.50.
Drug stocks dropped amid concern the stronger dollar will crimp overseas profits for multinational pharmaceutical companies. Merck fell 37.5 cents, to $50.125; Eli Lilly & Co. dropped 87.5 cents, to $75.875; Pfizer fell $1.125, to $49; and Johnson & Johnson declined $1.25, to $68.625.
Chip stocks, by contrast, rallied after an industry trade group reported North American chip orders set a record in July, beating analysts' expectations and auguring well for company earnings.
Intel Corp. was the biggest gainer in the Nasdaq, rising $1.875, to $66.125. Texas Instruments Inc. added $2, to $149.50; Motorola Inc. gained $1.375, to $76.75; Micron Technology Inc. rose 87.5 cents, to $62.875; Applied Materials Inc. climbed $1.50, to $101.75; and KLA Instruments Corp. soared $6.75, to $86.75.
The Semiconductor Industry Association said its book-to-bill ratio rose to 1.22 in July from an upwardly revised 1.18 for June. That surpassed analysts' expectations of a 1.15 to 1.16 ratio. The July ratio means chip makers received $122 worth of new orders for every $100 worth of products shipped last month.
"The book-to-bill was very good, but there wasn't much follow-through," said Peter DaPuzzo, senior managing director at Cantor, Fitzgerald & Co. "People are realizing the performance they've got so far this year in these stocks is incredible and they are trying to lock it in."
Semiconductor and technology shares have risen so much this year that they already reflect the good news contained in the book-to-bill ratio, traders said. What's more, August is usually the weakest month for chip orders because so many buyers, especially in Europe, are on vacation. That means the prospects for the report aren't as bright.
Investors warned against reading too much into yesterday's decline, given the market's rally so far this year. Year to date, the Dow and S&P; 500 are up about 20 percent, while the Nasdaq composite is up 33 percent.