May 31 (Bloomberg) -- U.S. stocks fell after an index of Chicago-area business dropped in May to the lowest level in almost two years, suggesting the pace of economic growth is slowing more than expected.

``The economy is not going gangbusters, so we are not expecting large equity returns to materialize,'' said Lee Schultheis, who manages $110 million as chief investment strategist at Alternative Investment Partners LLC in White Plains, New York.

Alcoa Inc., the world's biggest aluminum maker, led the decline after the company said it received a subpoena from the Justice Department. DreamWorks Animation SKG Inc. dropped after the Wall Street Journal reported that the company overestimated DVD sales for its ``Shrek 2'' movie.

The Standard & Poor's 500 Index lost 4.53, or 0.4 percent, to 1194.25 as of 11:04 a.m. in New York. The Dow Jones Industrial Average decreased 41.97, or 0.4 percent, to 10,500.58. The Nasdaq Composite Index slipped 4.42, or 0.2 percent, to 2071.31. Financial markets in the U.S. were closed yesterday for the Memorial Day holiday.

Seven stocks decreased for every six that rose on the New York Stock Exchange. Some 283 million shares changed hands on the Big Board, in line with the same time a week ago.

This month, the Nasdaq has jumped 8 percent and is headed toward its biggest gain since October 2003. The S&P 500 and Dow average are headed toward their best monthly performance this year, gaining 3.3 percent and 3 percent, respectively, amid a decline in oil prices and earlier reports that showed the economy expanded in the first quarter at a faster pace than initially estimated.

Economic Reports

The National Association of Purchasing Management-Chicago said its Business Barometer fell to 54.1 from 65.6 in April. Economists in a Bloomberg News survey expected 61.4. Readings above 50 indicate growth.

Tomorrow a report on growth in U.S. manufacturing may show a decline. The Institute for Supply Management's index for manufacturing companies is expected to be 52.3 in May, down from 53.3 the month before, according to economists in a Bloomberg survey.

Benchmark indexes pared their losses after consumer confidence unexpectedly rose in May. The Conference Board said its index of consumer sentiment increased to 102.2 this month from 97.5 in April. It was expected to fall to 96.1 from the 97.7 previously reported for April, according to economists in a Bloomberg survey.

Alcoa Declines

Alcoa dropped 50 cents, or 1.8 percent, to $26.97 for the worst performance in the Dow average. The company said after the close of U.S. markets on May 27 that it received a subpoena from the Justice Department related to a grand jury probe of the aluminum-fluoride industry. Alcoa said it also faces investigations in Canada and Australia.

DreamWorks, the film studio run by Jeffrey Katzenberg, lost $2.43 to $29.92. The company misjudged sales for ``Shrek 2'' because it didn't understand the fast changing pace of the DVD market, the Journal reported. A new DVD typically gets more than 50 percent of its sales in the first week compared with about one-third five years ago, the paper said.

American International Group Inc., the largest insurer, decreased 32 cents to $56.08 after the company lowered five years of profit by $3.9 billion to correct improper accounting and increase reserves for asbestos and environmental claims.

Tibco Falls

Tibco Software Inc., whose programs link computer systems, decreased 25 cents to $6.08. The company said profit for the quarter ended May 27, excluding some costs, was 4 cents a share. Analysts expected 6 cents in a Thomson Financial survey.

Walt Disney, the second-largest U.S. media company, fell 36 cents to $27.52. Its ESPN sports cable-television network won't exercise an option to televise National Hockey League games for the 2005-06 season, ESPN spokeswoman Diane Lamb said. The two sides can still negotiate until tomorrow.

Second-quarter profits are estimated by analysts to increase at the slowest pace in three years as high energy prices prompt consumers and businesses to rein in spending. Earnings at the S&P 500 companies will likely rise 6 percent from a year earlier, the smallest gain since the second quarter of 2002, according to a Bloomberg analysis of data from Thomson. Analysts had estimated a gain of 8 percent.

Google Inc., the most-used Internet search engine, climbed $6.62 to $272.62. The stock may reach $300 in the next 12 months as the company expands beyond selling advertising tied to Internet searches, wrote Piper Jaffray & Co. analyst Safa Rashtchy in a report today.

Novellus Systems Inc. rose $1.02 to $26.94. The maker of machines used in semiconductor manufacturing boosted its second- quarter profit forecast to 20 cents to 22 cents a share from as much as 20 cents.

Calpine Gains

Calpine Corp., which said last week it will sell as many as eight power stations, added 18 cents, or 6.7 percent, to $2.88 for the best performance in the S&P 500. The company said it will sell its Saltend Energy Centre for $906 million and use the money to redeem preferred shares.

Shares of MBNA Corp. rose 30 cents to $21.65 after Barron's reported Wachovia Corp. is a ``rumored acquirer'' of the biggest independent U.S. credit card company. The weekly publication didn't cite a source for its information.

Ed Keon, chief investment strategist for Prudential Equity Group, increased his year-end forecast for the S&P 500 to 1300 from 1250. In his mid-year review and outlook, Keon said he was raising his forecast based on a ``firmer dollar, lower inflation worries, much stronger earnings than I expected and improved equity valuation.''

To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.

Last Updated: May 31, 2005 11:08 EDT