Wall Street sells off on weak earnings, election fears

By Lewis Krauskopf

(Reuters) - Wall Street sold off on Tuesday as disappointing corporate reports gave a sour tone to the start of earnings season and investors digested possible changing dynamics for the upcoming U.S. elections.

Alcoa <AA.N> shares tumbled 11.4 percent after the metals company's quarterly profit missed estimates and it lowered its revenue forecast.

Illumina <ILMN.O> shares plummeted 24.8 percent and were among biggest drags on the S&P 500 after the diagnostic test maker's weak quarterly update.

Investors have been looking for U.S. corporate earnings to strengthen after four quarters of declines, in order to support relatively high valuations for stocks. Although overall S&P 500 earnings are currently expected to fall 0.7 percent in the third quarter, according to Thomson Reuters data, a typical number of better-than-expected reports would result in a positive quarter.

At the same time, investors are bracing for the U.S. Federal Reserve to raise interest rates by the end of the year.

The initial disappointing reports have "led to a little bit of fear on the part of some people that you won’t get the earnings growth you need to match up with what it is almost inevitably an interest rate rise," said Rick Meckler, president of LibertyView Capital Management in Jersey City, New Jersey.

"The offset to rising interest rates would have to be economic growth."

In a potential obstacle to future profit growth, the dollar <.DXY> on Tuesday rose to its highest point since March against a basket of currencies, providing a pressure point for multi-national companies that could eventually see their foreign sales reduced when translated into the U.S. currency.

Market participants are also increasingly eyeing politics as the Nov. 8 U.S. elections draw near. Recent turmoil facing Republicans and the party's presidential candidate Donald Trump is leading to some speculation that a victory by Democrat Hillary Clinton could be accompanied by big gains by her party in Congress, investors said.

"There is more discussion that the control in Congress could possibly shift," said Ernie Cecilia, chief investment officer of Bryn Mawr Trust in Bryn Mawr, Pennsylvania. "The bottom line is that it’s not really priced into the market."

The Dow Jones industrial average <.DJI> fell 200.38 points, or 1.09 percent, to 18,128.66, the S&P 500 <.SPX> lost 26.93 points, or 1.24 percent, to 2,136.73 and the Nasdaq Composite <.IXIC> dropped 81.89 points, or 1.54 percent, to 5,246.79.

All 11 major S&P sectors ended negative. Healthcare <.SPXHC>, one of the sectors most sensitive to the outcome of the elections, led declines. The group slumped 2.5 percent, with fallout from Illumina's report also weighing.

Another healthcare company, St Jude Medical <STJ.N>, fell 3.5 percent after saying it would recall some implanted heart devices due to risk of premature battery depletion. Abbott Laboratories <ABT.N>, which has agreed to buy St Jude, dropped 5.4 percent.

Energy shares <.SPNY> fell 1.2 percent as oil prices retreated from one-year highs.

For the year, the S&P 500 is up 4.5 percent.

About 6.7 billion shares changed hands on U.S. exchanges, slightly below the 6.8 billion daily average for the past 20 trading days, according to Thomson Reuters data.

Declining issues outnumbered advancing ones on the NYSE by a 6.96-to-1 ratio; on Nasdaq, a 5.10-to-1 ratio favored decliners.

The S&P 500 posted 4 new 52-week highs and 4 lows; the Nasdaq Composite recorded 46 new highs and 59 lows.

(Additional reporting by Yashaswini Swamynathan in Bengaluru; Editing by Anil D'Silva and Nick Zieminski)