Shares test lows for the year as fears over corporate profits spook markets

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The benchmark FTSE 100 share index fell sharply to test its year-low yesterday, after overnight falls on Wall Street rekindled long-standing worries about the grim outlook for company profits.

Vodafone, the index's fourth-largest constituent, and the dominant banking stocks led the slide, which saw the FTSE 100 lose 120 points, or 2.3 per cent, at 5,082 in mid-morning trade.

Bargain hunters later lent support, pushing volumes to levels not usually seen after a holiday weekend. But the index closed at its lowest in nine weeks, down 83.2 at 5,119.9. Its counterparts in Paris and Frankfurt also retreated.

A negative research note on Vodafone by the investment bank Goldman Sachs saw the mobile phone giant sink as low as 92.5p and close at a fresh four-year low of 95.25p. The stock has fallen almost 50 per cent this year.

Banks including Lloyds TSB Abbey National and HBOS fell after analysts at Morgan Stanley warned over heated valuations in the sector. Meanwhile, energy giant BP, the FTSE 100's largest constituent, slid 3 per cent as the renewal of oil supplies from Iraq dampened prospects for the oil price.

But senior fund managers said a crash was unlikely and UK stocks were looking too cheap. "We're surprised by what's been happening. The market has been at these levels for about two years now ­ it's unlikely there'll be a total collapse from here," said Peter Chambers, chief investment officer at Gartmore Investment Management.

Mike Bishop, the head of pan-European equities at Morley Fund Management, said it had been a good day to perform some "nip and tuck" on his investment portfolios. "People are trading on short-term momentum. The time will come when growth stocks become so absurdly cheap that buying them becomes a no-brainer."

Vodafone was an all-or-nothing bet, he added. "If Vodafone isn't a buy at this level then it's heading to 50p. Otherwise it's going to double," he said.

The FTSE 100's difficulties were also a deferred response to Monday's mauling on Wall Street, prompted by fresh worries about the outlook for corporate profits and disappoint- ment at Friday's US unemployment figures. The Dow regained its composure yesterday on the back of strong US productivity data, closing up 29 at 9,836.6, but the Nasdaq chalked up another loss. After Wall Street closed, the internet bellwether Cisco held out a glimmer of hope for the beleagued tech sector, reporting a better-than-expected rise in third-quarter profits to $838m before one-off charges, compared with $230m a year ago .

Strategists said the FTSE 100 could yet slip out of the 5,000 to 5,400 trading range that it has occupied since November. It is now about 1 per cent down on its opening level this year.

Steve Russell, UK equity strategy at HSBC, put the FTSE 100's latest travails down to investors' nerves. "The market's fundamentals are pretty positive. While fund managers believe in the economic recovery, they fear that it will be dislocated from corporate profits," he said.

Peter Sullivan at Goldman Sachs said the market would regain upward momentum within 12 months. "Can it go lower? Well we can we have more disappointments on company earnings, so yes it can," he said. "The strange thing is not the weakness of the market today, but the optimism at the beginning of the year."

Graham Secker at Morgan Stanley said that fear the economic recovery might stall was delaying the awaited "rotation" into growth stocks more geared towards the upturn. "There's little appetite for taking big bets. There needs to be a catalyst for sector rotation and it's hard to see where that's going to come from," he said.