A rare disappointing earnings report from JPMorgan Chase battered bank stocks on Friday and helped push the rest of the market lower. Rumors of imminent downgrades for the credit ratings of European governments drove the euro down and sent investors streaming into U.S. debt.
The Dow Jones industrial average fell 48.96 points to close at 12,422.06, a drop of 0.4 percent. Markets were little changed late in the day after France's finance minister confirmed that Standard & Poor's had stripped the country of its AAA credit rating.
Before the market opened, JPMorgan said quarterly profit declined 23 percent from a year earlier, slightly worse than what analysts expected. The bank's stock lost 2 percent, and other large banks followed. Morgan Stanley fell 3 percent and Goldman Sachs 2 percent.
It was the first time JPMorgan missed Wall Street expectations since the final quarter of 2007, a period that includes the financial crisis of 2008 and 2009. JPMorgan is widely considered one of the best-managed big banks. Traders figured that if JPMorgan had trouble as 2011 came to a close, the rest of the industry probably did, too.
"JPMorgan is the gold standard," said Phil Orlando, chief equity strategist at Federated Investors. "So what happens to the banks that aren't quite as strong and aren't quite as well-managed?"
On trading desks, it's called the "cockroach theory," Orlando said. "You never see just one cockroach. If you see one, you know there's bound to be a lot more."
The euro slipped to its lowest level in 17 months after reports surfaced that S&P would downgrade European governments. After the markets closed in New York, S&P announced cuts for France, Austria, Italy and Spain.
The euro dropped 1.1 percent against the dollar to $1.27. Borrowing costs jumped for France, Italy and Spain, countries at the center of the region's debt crisis.
The dollar and U.S. Treasury prices rose as investors moved money into lower-risk assets. The yield on the 10-year U.S. Treasury note fell to 1.86 percent from 1.93 percent late Thursday.
S&P warned Dec. 5 that 15 countries that use the euro were at risk of downgrades, citing higher borrowing costs for top-rated governments and disagreements among European leaders.
The danger is to the European rescue fund. France is the second-largest contributor to the fund behind Germany. Bond traders could respond to the French downgrade by raising borrowing costs for the rescue fund, in the expectation that its rating will be cut next.
"The knock-on effects are far more significant than the impact on France itself," LeBas said.
JPMorgan's results opened the earnings season for banks on a sour note. Though an increasing pace of earnings reports may help steer the markets over the coming days, Europe's debt crisis is likely to remain the focus.
In other trading, the S&P 500 index fell 6.41, or 0.5 percent to 1,289.09. The Nasdaq composite index fell 14.03, or 0.5 percent, to 2,710.67. Even with Friday's fall, all three indexes posted gains for the second straight week. The S&P 500 index is up 2.5 percent to start the year.
Among stocks making larger moves than the overall market Friday:
— Diamond Foods Inc., which makes Emerald Nuts, plunged 10 percent after The Wall Street Journal reported that federal prosecutors had opened a criminal inquiry into its financial practices. The Journal also reported that two large shareholders had dumped most of their stakes in the company.
— Safeway Inc., the grocery store chain, rose 1.8 percent. An analyst at Jefferies placed a "buy" rating on the stock on the expectation that the company will benefit from an improving job market, especially in California.
— Alpha Natural Resources fell 10 percent, the largest loss in the S&P 500. The coal company bought Massey Energy last year, and the Justice Department is considering whether to prosecute the people who ran Massey when its Big Branch mine exploded in 2010.