Oct. 28 (Bloomberg) -- U.S. stocks sank, extending a global slump, as an unexpected decrease in new-home sales added to concern the seven-month rally in equities outpaced prospects for economic growth. The dollar rose against most major currencies and Treasuries gained, while oil and metals tumbled.

Alcoa Inc., Caterpillar Inc. and Intel Corp. dropped at least 3.6 percent to lead declines in the Dow Jones Industrial Average. Homebuilders Lennar Corp. and D.R. Horton Inc. tumbled more than 5.8 percent after the Commerce Department said sales of new homes fell 3.6 percent in September. European and Asian shares slid as companies from SAP AG to ArcelorMittal and Canon Inc. reported disappointing earnings, while Brazil’s benchmark index extended a plunge from its high of the year to 11 percent.

The Standard & Poor’s 500 Index retreated 2 percent to 1,042.63 at 4:08 p.m. in New York, its steepest drop since Oct. 1. The Dow lost 119.48 points, or 1.2 percent, to 9,762.69. The MSCI World Index of 23 developed nations lost 2 percent. Some 14 stocks fell for each rising on the New York Stock Exchange.

“The stock market is due for a correction,” said Hank Smith, who helps oversee $5.5 billion as chief investment officer of Haverford Trust Co. in Radnor, Pennsylvania. “Even though the economy has bottomed out, we’re still getting some disappointing numbers now and then. On the earnings front, a good deal of growth came in from cost cutting. Investors are using all that as an excuse to pull back.”

Erasing October Gain

The S&P 500 fell for a fourth straight day, the longest streak in almost a month. The index has erased its advance for October, leaving it poised to break a streak of seven monthly gains. The benchmark index for U.S. equities has rallied 54 percent from a 12-year low on March 9 amid growing confidence a U.S. economic recovery will drive profit growth. It has slipped 5 percent from this year’s high on Oct. 19 on speculation the rally outpaced the prospects for earnings.

Goldman Sachs Group Inc. cut its forecast for third-quarter U.S. gross domestic product growth to 2.7 percent from 3 percent, citing shipments and inventories data in the Commerce Department’s durable goods report today. The government will report the preliminary figure tomorrow and the median forecast in a survey of economists is for growth of 3.2 percent following four straight quarters of contraction.

Earnings-per-share have topped estimates at 82 percent of the companies in the S&P 500 that reported third-quarter results so far, which would be a record proportion for a full quarter in Bloomberg data going back to 1993. Still, profits have decreased 19 percent on average for the 236 companies that reported since Oct. 7. Sales have slumped 5.8 percent and surpassed estimates at 64 percent of the companies.

‘Ahead of Itself’

“The stock market has gotten ahead of itself and to sustain those values going forward we’ll need to see real economic growth,” said Peter Jankovskis, who helps manage more than $1.5 billion at Oakbrook Investments in Lisle, Illinois. “The weakness in consumer spending is still the key issue to be resolved.”

A gauge of 12 homebuilders in S&P indexes slumped 5.5 percent, as D.R. Horton and Lennar lost 5.8 percent and 7.5 percent respectively. The drop in new home sales signaled the housing recovery may lose momentum as a government tax credit expires.

Goodyear Tire & Rubber Co. fell 20 percent to $13.46 in its biggest decline since the market crash of 1987. The largest U.S. tiremaker forecast an operating loss in North America this quarter. The outlook came even as the company said third-quarter net income more than doubled to $72 million, or 30 cents a share, from $31 million a year earlier. Sales fell 15 percent to $4.4 billion.

Auto Shares Tumble

A gauge of auto and components companies tumbled 5.3 percent for the biggest decline in the S&P 500 among 24 industries. Ford Motor Co. lost 5.1 percent to $6.96, while Harley-Davidson Inc. declined 4.7 percent to $25.10.

Shares in Europe and Asia declined after SAP cut its software sales forecast and Canon posted a seventh straight quarterly profit drop. Europe’s Dow Jones Stoxx 600 Index slid 2 percent, while the MSCI Asia Pacific Index lost 1.3 percent. Both indexes have soared more than 50 percent since their lows in March. Brazil’s Bovespa index plunged 4.8 percent, entering a so-called correction marked by a decline of 10 percent from a peak, as a tax on share purchases sapped demand.

Oracle Corp., the world’s second-largest software maker, fell 2.6 percent to $21.30 following SAP’s report.

Apollo Group Inc. lost 18 percent to $60.06, its steepest tumble since March 2008. The Securities and Exchange Commission is probing the parent of the University of Phoenix for “revenue recognition,” the company said in a statement. Apollo Group expects to pay about $80.5 million in settlement and legal costs for a lawsuit related to its recruitment practices, according to the statement.

Commodity Producers

Gauges of raw-materials and energy producers fell at least 2.9 percent as a rebounding dollar reduced the appeal of commodities as an alternative investment.

Oil tumbled the most in a month after a government report showed an unexpected increase in supplies of gasoline and crude inventories climbed to a two-month high. Crude fell 2.6 percent to $77.46 a barrel in New York. Copper dropped for a third day.

The Dollar Index, a six-currency gauge of the greenback’s performance, added 0.5 percent and has gained for five straight days, its longest rally since July. The measure slipped to a 14- month low on Oct. 21.

Exxon Mobil Corp., the world’s biggest energy company, fell 1.4 percent to $73.84, while Freeport-McMoRan Copper & Gold Inc., the world’s largest publicly traded copper producer, declined 5.2 percent to $73.45.

Too Big To Fail

A gauge of 79 banks, insurers and investment firms in the S&P 500 slumped 3.2 percent for the biggest decline among 10 industries. Bank of America Corp., JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley fell at least 2.8 percent.

Federal Deposit Insurance Corp. Chairman Sheila Bair endorsed a proposal in House legislation that would let her take apart large, complex financial firms, expanding authority the agency has to shut failed banks.

House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, unveiled draft legislation yesterday to create a council of regulators, including the FDIC, to monitor large financial companies and the economy for systemic risk. The bill gives the FDIC the power to disassemble bank holding companies and other firms whose failure could harm the economy.

SanDisk Corp. lost 4.7 percent to $21.62. The world’s largest maker of flash-memory cards used in digital cameras and mobile phones was cut to “neutral” from “buy” at Goldman Sachs Group Inc.

‘Stark Contrast’

U.S. companies have retreated 0.7 percent on average in the trading session following their earnings reports this month, the worst performance in Bespoke Investment Group LLC data going back to 2001. Stocks are dropping even as profit at S&P 500 companies topped analyst estimates by an average 15 percent since Oct. 7.

“The current earnings season stands in stark contrast to the prior two in which stocks soared on their report days, as investors were pleasantly surprised by strong numbers,” Harrison, New York-based Bespoke said in the report today. “Stock reactions indicate that investors priced this in and then some heading into earnings season.”

The S&P 500 closed today below its average price over the last 50 days. Some technical analysts, who make predictions based on price and volume history, say a move below the 50-day moving average could indicate further losses.

CIT, Phone Shares Gain

CIT Group Inc., the 101-year-old commercial lender seeking to avoid collapse, rallied 10 percent to $1.06 after receiving $4.5 billion in financing by expanding an existing credit facility.

Telephone shares had the only gain in the S&P 500 among 10 industries, rising 1.8 percent as a group. Qwest Communications International Inc. added 2.6 percent to $3.54. The local phone company in 14 states reported third-quarter profit excluding some items of 9 cents a share, beating the average analyst estimate of 7 cents, as Qwest reduced costs to offset subscriber losses.

AT&T Inc. and Verizon Communications Inc. had the biggest gains in the Dow average, rising at least 1.9 percent.

Visa Inc. climbed 3.6 percent to $76.57. The world’s biggest payments network posted results that exceeded most analysts’ forecasts and said a yearlong skid in consumer spending has ended.

IPO Watch

Vitamin Shoppe Inc. jumped 5.6 percent to $17.95 after surging as much as 19 percent in its first day of trading on the New York Stock Exchange. The retailer, Blackstone Group LP and the family of founder Jeffrey Horowitz raised $155 million yesterday after selling shares above the forecast price range, according to Bloomberg data. The $17-a-share offer valued Vitamin Shoppe at about $470 million and exceeded the $14 to $16 the company sought.

Vitamin Shoppe was the 17th U.S. company to raise money in an IPO since September, the busiest period in almost two years, as sellers take advantage of the biggest equity rally since the 1930s.

Norway today became the first European central bank to raise interest rates since the credit crisis began. The fifth- biggest oil exporter boosted its key interest rate a quarter point from a record low and signaled more increases. Global governments and central banks are preparing to remove stimulus measures after spending a total of $12 trillion, by International Monetary Fund estimates, to haul economies out of the recession.

Fed Watch

Federal funds futures trading shows that traders are pricing in an 18 percent chance the Federal Reserve will lift its benchmark rate from a record low range of zero to 0.25 percent by its January policy meeting. Futures show no chance of a rate increase before then.

“I don’t think the Fed is going to take away the money supply quite yet,” Vince Farrell Jr., chief investment officer at Soleil Securities Group in New York, said in a Bloomberg Radio interview. “The economic signals are still very mixed. It looks like the recovery is fragile.”

Treasuries remained higher after the U.S. sold a record $41 billion in five-year notes, the third of four government debt auctions this week totaling $123 billion. The yield on the 10- year note fell three basis points to 3.42 percent.

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

Last Updated: October 28, 2009 16:50 EDT