Stocks opened higher, but descended into gloom during the session as investors grew concerned that business conditions had reached their peak and were likely to worsen for companies going forward. The Dow Jones Industrial Average (^DJI 0.12%) and the S&P 500 (^GSPC 0.52%) both posted significant losses, but closed above lows for the day.

Today's stock market

Index Percentage Change Point Change
Dow (1.74%) (424.56)
S&P 500 (1.34%) (35.73)

Data source: Yahoo! Finance.

The industrial and materials sectors were the weakest. The Industrial Select SPDR ETF (XLI 0.31%) fell 2.8% and the Materials Select Sector SPDR ETF (XLB 0.76%) lost 2.7%.

Two Dow components were pummeled after reporting earnings. Caterpillar (CAT 1.33%) and 3M Company (MMM 0.72%) both got investors worried about business going forward.

Falling stock graphs and red down arrow.

Image source: Getty Images.

Caterpillar sees strong global demand, but investors focus on rising costs

Caterpillar reported record first-quarter profits on strong sales and raised its outlook for the year, but concerns about input costs caused the stock to fall 6.2% and helped trigger the market sell-off. Revenue increased 31% to $12.9 billion and adjusted earnings per share more than doubled to $2.82, compared with $1.28 last year. Analysts had been expecting the company to earn $2.08 per share on revenue of $12 billion.

Demand for Caterpillar's products was strong across all segments and geographies. Sales in the construction industries segment were up 38%, resource industries jumped 31%, and energy and transportation grew 26%. North American sales increased 33% and Asia-Pacific growth was particularly strong at 44%. The strong sales volume led the company to increase its per-share profit forecast for the full year by $2.00, from a range of $7.75 to $8.75 to a range of $9.75 to $10.75. On an adjusted basis, Caterpillar guided to full-year profit of $10.25 to $11.25 per share, while the consensus analyst estimate had been $9.17.

Everything was going great during the conference call -- the stock price had actually climbed in the morning -- until analysts started questioning why the company was saying that Q1 EPS would be the "high-water mark" for the year. The response was that input costs such as steel are expected to rise faster than the company's ability to raise prices. Despite management's point that rising commodity prices actually help demand from the Caterpillar's end markets, and ignoring the company's hugely improved outlook for profit for the full year, investors focused on that one possible concern today.

3M lowers profit guidance for the year

3M reported decent first-quarter earnings but lowered its earnings forecast for the year, and shares dropped 6.8%. Sales were up 7.7% to $8.28 billion, edging out the analyst consensus forecast of $8.23 billion. Adjusted EPS, excluding one-time charges due to a legal settlement and the new tax law, came in at $2.50, meeting expectations. 

The company said that "a few markets were softer than we anticipated going into the year." In response, 3M cut $0.15 off the top end of its forecast for adjusted EPS for the full year, resulting in a new range of $10.20 to $10.55. Guidance for organic local-currency sales growth was lowered from 3%-%5 to 3%-4%. 

Three business segment posted good growth at or above targets for the year: safety and graphics, electronics and energy, and consumer. The unanticipated softness was in oral health, drug delivery, and automotive aftermarket. 

The good-but-not-great results and the slightly lowered forecast were somewhat disappointing, but the magnitude of Wall Street's response, especially considering that the stock was already down 17% from its 52-week high, was more an indication of the market's overall nervousness at the moment than anything else.