Wall Street drops as investors wary of weak earnings

U.S. stocks slipped in light trading on Monday, pulling back from recent five-year highs ahead of an earnings season expected to be weak.

Trading volume was the lowest so far this year in a full session as the U.S. government and the bond market were closed for the Columbus Day holiday. About 4.1 billion shares changed hands on the New York Stock Exchange, the Nasdaq and NYSE MKT, compared with the year-to-date daily average of 6.54 billion to last Friday.

Stocks were pressured throughout the day as the World Bank cut its growth forecasts for the East Asia and Pacific region, and warned that the slowdown in China could worsen and last longer than many analysts expect.

Analysts expect third-quarter earnings to fall for the first time in three years even though the S&P 500 gained 5.8 percent during that period. Such a grim forecast might call into question whether the rally can be sustained.

"Certainly there have been a lot of downward revisions in earnings in general," said Peter Jankovskis, co-chief investment officer of OakBrook Investments LLC in Lisle, Illinois. "Some people are predicting that we may see an overall decline in earnings, so there may be some defensive posturing and profit-taking."

The reporting season begins in earnest on Tuesday with Dow component Alcoa Inc , which is expected to post a break-even quarter compared with a profit of 15 cents per share a year earlier. Alcoa shares rose 0.3 percent to $9.12.

The Dow Jones industrial average fell 26.50 points, or 0.19 percent, to 13,583.65 at the close. The S&P 500 lost 5.05 points, or 0.35 percent, to 1,455.88. The Nasdaq Composite dropped 23.83 points, or 0.76 percent, to end at 3,112.35.

Analysts forecast third-quarter earnings of S&P 500 companies will fall 2.3 percent from the year-ago quarter, according to the latest Reuters data. Earnings for the fourth quarter, which will be reported early next year, are seen up 9.6 percent.

However, some questioned whether the earnings bar was being set too low.

John Manley, chief equity strategist for Wells Fargo Advantage Funds in New York, said companies will find it hard to disappoint, and "surprises will have a more positive than negative look."

Further weighing on sentiment, euro-zone finance ministers said Spain did not need a bailout because it was taking steps to put its finances in order. Expectations that Madrid would ask for financial aid have helped support equities and other risky assets over the past several weeks.

Recent earnings warnings from large multinationals such as FedEx , Caterpillar and Hewlett-Packard have cited weakness in Europe and China.

According to Thomson Reuters data through Monday, 91 companies in the S&P 500 have issued negative outlooks versus 21 positive pre-announcements, for a ratio of 4.3, the weakest showing since the third quarter of 2001.

Netflix gained 10.5 percent to $73.52 after Morgan Stanley raised its rating to "overweight" on the stock of the video streaming company, saying that Netflix could become a global video platform.

Apple Inc shares fell 2.2 percent to $638.17, ranking as the biggest drag on both the S&P 500 and the Nasdaq 100 despite denials of a strike at one of its manufacturing plants. China Labor Watch said a Foxconn plant in China that makes Apple's iPhone was crippled by a strike, but Foxconn, a Taiwanese company, denied the report.

UnitedHealth Group shares gained 0.8 percent to $57.60 on news that it will buy control of Amil Participacoes SA , Brazil's largest health insurer and hospital operator, for $4.9 billion, making a move into a fast-growing market as challenges mount for its U.S. business.

Decliners outnumbered advancers on the NYSE by a ratio of 3 to 2, while on the Nasdaq, more than five stocks fell for every three that rose.

(Editing by Jan Paschal)