Are investors wary of bubble?

U.S. stocks fell after equity gauges dropped from records, as investors weighed valuations before the start of the earnings season.

Delta Air Lines Inc. and Southwest Airlines Co. slid at least 4.5% as carriers slumped. AbbVie Inc. dropped 1.6% after raising its offer to buy Shire Plc to $51.5 billion. Alcoa Inc. was little changed before it reports results later today. Groupon Inc. advanced 2.4% as B. Riley & Co. recommended buying the stock.

The Standard & Poor’s 500 Index (CME:SPU14) slipped 0.4% to 1,969.08 at 9:46 a.m. in New York. The Dow Jones Industrial Average lost 79.99 points, or 0.5%, to 16,944.22. Trading in S&P 500 stocks was in line with the 30-day average at this time of day.

“With the equity markets hitting new highs, you might be seeing people take some of those gains off the table,” Chris Gaffney, senior market strategist at EverBank Wealth Management in St. Louis, said in a phone interview. “We’re setting up in wait-and-see mode ahead of earnings. The equity markets going forward are going to be all about the consumer and whether they’re able to support higher earnings.”

Both the S&P 500 and the Dow retreated from records yesterday amid speculation the Federal Reserve will raise interest rates sooner than expected. The Russell 2000 Index of smaller companies tumbled 1.8%, the most since April 25.

The Fed will release minutes from its June meeting tomorrow. Policy makers trimmed bond purchases last month by $10 billion for the fifth consecutive time, saying economic growth is rebounding and the job market is improving.
 

Rate Timing
 

Officials are debating the timing for the first increase in the main interest rate since 2006. Policy makers have kept their target for overnight lending between banks in a range of zero to 0.25% since December 2008.

Goldman Sachs Group Inc. yesterday joined banks including JPMorgan Chase & Co. and Bank of Tokyo-Mitsubishi UFJ Ltd. in bringing forward it estimates for Fed rate increases after data last week showed the economy added more workers than estimated in June.

In Europe, signs the economic recovery is losing momentum sent stocks lower for a third day. U.K. manufacturing unexpectedly slumped the most in 16 months in May and German exports contracted more than estimated, data showed today.

Alcoa, the largest American aluminum producer, will report second-quarter earnings after the close of trading today, unofficially kicking off the season. Citigroup Inc., JPMorgan Chase & Co., Goldman Sachs, Yahoo! Inc. and Johnson & Johnson are among companies reporting financial results in the next week.
 

Earnings Estimates
 

Profit for S&P 500 members probably climbed 5% in the three months through June, while sales rose 3%, according to analyst estimates compiled by Bloomberg. Three rounds of monetary stimulus from the Fed and better-than- forecast corporate earnings have driven the S&P 500 up more than 190% from a low reached in March 2009.

The U.S. equity index is trading at 16.7 times the projected earnings of its members, near its highest valuation since the end of 2009 and higher than the five-year average of 14.3.

“Equities are near all-time highs and the air will only get thinner,” said Heinz-Gerd Sonnenschein, a strategist at Deutsche Postbank AG in Bonn, Germany. “We need a strong results season now to support equities because investors will keep wondering when the Fed will hike rates and this can bring some nervousness to the market.”
 

Volatility Spike
 

The Chicago Board Options Exchange Volatility Index, the measure known as VIX that tracks investors’ volatility expectations for the S&P 500, jumped 9.8% yesterday from a seven-year low. The index added 5.8% to 11.99 today.

Nine of the 10 main S&P 500 groups retreated today. Health- care shares slid 0.8% while industrial stocks dropped 0.6%.

AbbVie slid 1.6% to $56.47. The drugmaker split last year from Abbott Laboratories made a fourth offer to buy Shire, raising the price to about 30.1 billion pounds ($51.5 billion) in an effort to bring Shire to the negotiating table.

PHH Corp. added 3.3% to $24.05. The company intends to buy back as much as $450 million of its own shares, starting after the release of its second-quarter results.

Groupon advanced 2.4% to $6.61 as B. Riley upgraded its rating on the stock to buy from neutral. Shares of the provider of daily deals have lost 45% this year.

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