While The Street was able to ignore Europe's struggles for the past few days, the struggles of Spain on Friday proved too much for the market to bear. As Spain's stock market plunged 6 percent, the Dow Jones dropped 120 points to close at 12,822.
Friday put Europe squarely back in the spotlight.
U.S. stocks fell sharply as escalating problems in Spain jolted investors. Spain's stock market plunged 6 percent and its borrowing costs spiked after a regional government asked for a financial lifeline.
The drop on Wall Street, which sent the Dow Jones industrial average down as much as 133 points, marked a U-turn for the market. Stocks had risen over the past three days as investors focused on healthy earnings from U.S. companies like Mattel, Honeywell and Coca-Cola.
On Friday, talk of sluggishness in Europe was prevalent as more companies turned in their quarterly results.
Xerox trimmed its earnings forecasts as Europeans bought less equipment. Ingersoll-Rand, whose products include Trane air conditioners, cut its revenue prediction for the same reason. Both stocks fell.
Late Thursday, guitar maker Fender abruptly canceled its plans to go public, blaming "current market conditions" and "concerns about economic conditions in Europe." And General Electric, though its stock rose slightly, noted Friday that its orders also fell in Europe.
"We prepared ourselves for a pretty tough year this year, or certainly a volatile year," CEO Jeff Immelt said in a call with analysts. "We haven't been disappointed." GE's finance officer, Keith Sherin, said the company is making "a full-court press" to reduce exposure to Europe.
All the major U.S. stock indexes fell. The Dow Jones industrial average dropped 120.79 points to 12,822.57. The Standard & Poor's 500 fell 13.85 to 1,362.66. The Nasdaq composite index lost 40.60 to 2,925.30. All three indicators were down about 1 percent. They eked out tiny gains for the week and are about flat for the month to date.
Despite the generally sour mood in the market, two tech companies soared on their first day of trading. Kayak Software, a travel-booking website, jumped 28 percent, or $7.18, to $33.18. Palo Alto Networks, a technology security company, rose 27 percent, or $11.13, to $53.13.
The broad downturn was an unwelcome change after three days of gains, the Dow's longest winning streak in more than a month. Until Friday, investors focused on upbeat earnings from U.S. companies. Nearly three-fourths of the companies that have reported second-quarter earnings so far have beat expectations, according to FactSet.
Jeff Mortimer, director of investment strategy for Bank of New York Mellon's wealth management division, expects Europe's problems to drag on for a long while.
"There is no quick answer to the issues that they're wrestling with," he said. "They have a sovereign debt issue, they have a banking issue and they have a growth issue. ... I think we'll have one eye over there for years."
Spain was the epicenter of the latest European earthquake. Protestors took to the streets to voice their disapproval of government spending cuts. The Treasury minister predicted that the recession would drag on into next year. And the region of Valencia said it needed help from the central government to pay its bills.
Spain did get approval from the other euro countries for a bailout for its struggling banks, but that wasn't enough to calm investors. The Spanish government's borrowing costs shot above 7 percent, meaning the country could soon find itself unable to afford to borrow money. Spain's benchmark stock index plunged 6 percent.
To be sure, bad financial news out of Spain is hardly new. Just as troubling, if not more so, were budding signs that the crisis is deepening even among Europe's relatively strong members. Germany announced that its economic growth likely slowed in the second quarter. In the U.K., the government said it had to borrow more than expected in June.
Among other stocks making big moves:
—Chipotle plunged 22 percent even though the burrito chain reported big jumps in revenue and profits. Even though revenue climbed 21 percent, analysts had expected more. Chipotle stock lost $86.88 to $316.98.
—The country's six megabanks — Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo — all fell. Investors are concerned about an array of recent challenges, including Moody's downgrades at all the banks except Wells, and net job cuts over the year at all the banks except JPMorgan.