Jan. 24 (Bloomberg) -- U.S. stocks fell for a third week as disappointing earnings at companies from Microsoft Corp. to Fifth Third Bancorp increased concern the recession is deepening and that banks need to raise more capital.

Microsoft tumbled 13 percent after saying it’s no longer able to give forecasts as the slumping economy crimped demand for software. Fifth Third, Ohio’s second-largest bank, plunged 46 percent after posting a third consecutive quarterly loss. Financial shares led decliners, dragging the KBW Bank Index to a 14-year low, as analysts predicted mounting losses.

The Standard & Poor’s 500 Index fell 2.1 percent to 831.95 this week, bringing its 2009 loss to 7.9 percent. Only 2008 and 1939 had steeper declines this far into the year. The Dow Jones Industrial Average slipped 2.5 percent to 8,077.56. The Russell 2000 Index of small companies decreased 4.7 percent to 444.36.

“We expected it to be a really nasty quarter,” Quincy Krosby, Hartford, Connecticut-based chief investment strategist at Hartford Financial Services Group Inc., said in a Bloomberg Television interview. The firm has $385 billion in assets. “You start off with the financials, which we expected to be particularly dreadful, and that sets a negative tone. It is going to be a tough year.”

The 112-year-old Dow slid 4 percent on Jan. 20, the most on an Inauguration Day, as President Barack Obama was sworn in. Wells Fargo & Co. and Bank of America Corp. slumped more than 13 percent for the week on speculation they will be forced to take steps to shore up their balance sheets.

Profit Drop

Profits have decreased 60 percent for the 69 companies in the S&P 500 that have released fourth-quarter results since Jan. 12. U.S. analysts now forecast a 32 percent drop in earnings for the fourth quarter after saying in March 2008 that net income would rise as much as 55 percent, according to Bloomberg data.

Nine of 10 industries in the S&P 500 may show lower profits, the broadest slump since Bloomberg began compiling the data in 1998. The biggest losses may come from metal producers, financial firms and consumer companies reliant on discretionary spending.

Forecasts have been too optimistic since the period ended September 2007, when the profit slump began. Analysts failed to anticipate the S&P 500 earnings decline by an average 7.7 percentage points, based on estimates at the beginning of each reporting season compiled by Bloomberg.

Lease Losses

Microsoft lost 13 percent to $17.20. The world’s biggest software maker said it will eliminate 5,000 jobs as it cuts costs to match a slump in demand. The company also posted second-quarter sales and profit that missed projections. Microsoft follows General Electric Co., Corning Inc., Johnson Controls Inc. and Eastman Kodak Co. in declining to forecast results for 2009.

Financial stocks in the S&P 500 fell 7.1 percent this week, the most among 10 industries. Fifth Third dropped 46 percent to $2.91. The Cincinnati-based lender’s results were hurt by commercial real-estate loans in Florida and Michigan and a boost of reserves for loan and lease losses.

Wells Fargo, the largest bank on the U.S. West Coast, slid 15 percent to $15.87. Friedman Billings Ramsey Group Inc. analyst Paul Miller lowered his earnings estimates and price target, in addition to predicting a dividend cut.

Bank of America dropped 13 percent to $6.24. FBR’s Miller estimated that the biggest U.S. lender by assets needs at least $80 billion of additional capital. Bank of America pared more than half of a 29 percent loss on Jan. 20 after Chief Executive Officer Kenneth Lewis and five directors bought shares.

Citigroup Falls Below $3

Citigroup Inc. traded under $3 for the first time since July 1992, dropping as much as 20 percent before paring its decline to 0.9 percent and ending the week at $3.47. The company lowered its quarterly dividend to a penny a share from 16 cents to comply with the terms of the $20 billion capital injection in received from the U.S. government in November.

Citigroup also named former Time Warner Inc. Chief Executive Officer Richard Parsons to head its board, replacing Chairman Win Bischoff after posting a record $18.7 billion net loss last year.

Huntington Bancshares Inc. tumbled 28 percent to $3.27. The Columbus, Ohio-based bank canceled 2008 management bonuses and cut its dividend to a penny a share from 13.25 cents after posting a $417.3 million net loss.

U.S. companies are reducing dividends at the fastest rate in half a century, squeezing investors who depend on the payouts more than ever to boost returns. Five companies in the S&P 500 slashed $7.5 billion in outlays this month, more than all the cuts from 2003 to 2007, S&P said.

Stabilize Banking System

The U.S. government has taken preferred equity stakes in at least 257 banks including Bank of America, Wells Fargo, Bank of New York Mellon Corp. and State Street Corp. since October under its Troubled Asset Relief Program aimed at stabilizing the banking system.

Obama administration officials are studying the creation of a “bad,” or “aggregator,” bank to buy impaired assets that have curbed the ability of lenders to make new loans, Timothy Geithner, Obama’s nominee for Treasury secretary, said during confirmation hearings this week.

“In order to clear the air, the government is going to have to take over these toxic assets,” Marshall Front, who oversees about $600 million as chairman of Front Barnett Associates in Chicago, said in an interview with Bloomberg Television. “That will set the stage for at least some period of less stress during which private capital may be willing to come into these banks.”

Stimulus Plan

Obama pressed congressional leaders to reach a consensus on an $825 billion stimulus plan, warning the country may be facing an “unprecedented” economic crisis. Average home prices dropped the most in at least 18 years in November, housing starts fell 16 percent last month and the number of Americans filing first-time claims for jobless benefits climbed to a 26- year high.

GE dropped 14 percent to $12.03. The world’s biggest maker of power-plant turbines, jet engines, locomotives and medical imaging equipment forecast $10 billion in credit losses this year, $1 billion more than its prior estimate. Per-share profit excluding a payment was 37 cents in the fourth quarter. As recently as September, analysts predicted GE would earn a record 71 cents a share.

KeyCorp, Noble Rise

Aflac Inc. fell 38 percent to $24.49 after Morgan Stanley called the company’s investments in U.K. banks “a rapidly escalating concern.” The largest seller of supplemental insurance may face losses on investments in hybrid securities issued by firms including Royal Bank of Scotland Group Plc, HBOS Plc and Barclays Plc, according to a report by Nigel Dally, an analyst at Morgan Stanley.

KeyCorp gained 21 percent to $7.62 after Chief Executive Officer Henry Meyer said the Ohio bank probably won’t need to raise cash this year or next.

Noble Corp. increased 15 percent to $24.92. The second- largest U.S. offshore oil driller said fourth-quarter profit rose 20 percent as long-term service contracts with explorers and producers offset falling crude prices.

International Business Machines Corp. gained 5.4 percent to $89.49. The biggest computer-services provider posted fourth- quarter profit that topped analysts’ estimates as it coped with a worldwide technology slump by cutting costs and adding products.

Google Inc., owner of the most popular Internet search engine, gained 8.4 percent to $324.70 after the company sustained profit growth by cutting expenses as revenue growth slowed.

Dow companies scheduled to report earnings next week include American Express Co., Exxon Mobil Corp., McDonald’s Corp. and Procter & Gamble Co.

To contact the reporter on this story: Eric Martin in New York at emartin21@bloomberg.net.

Last Updated: January 24, 2009 08:00 EST