July 28 (Bloomberg) -- U.S. stocks fell and the Standard & Poor’s 500 Index retreated from an eight-month high as consumer confidence trailed projections and companies from Office Depot Inc. to Coach Inc. posted worse-than-estimated results.

American Express Co. and Exxon Mobil Corp. helped lead the Dow Jones Industrial Average lower as the Conference Board report reinforced concern that rising unemployment is undermining consumer sentiment. Office Depot, the second-largest business-supply retailer, slid 18 percent and Coach, the biggest U.S. maker of luxury leather handbags, declined 1.3 percent. Losses were limited as technology and health-care stocks gained.

The S&P 500 slipped 0.3 percent to 979.62 at 4:05 p.m. in New York after a two-week rally left the index trading at 16.23 times its companies’ earnings from the past year, the most expensive valuation since September. The Dow lost 11.79 points, or 0.1 percent, to 9,096.72. Europe’s Dow Jones Stoxx 600 Index slumped 0.9 percent.

“My concern is that the valuations aren’t justified,” said Charles Knott, chief investment officer at Knott Capital Management in Exton, Pennsylvania, who oversees about $500 million. “The market has come a long way in the last month and while earnings have generally exceeded expectations, the expectations were probably set too low.”

While the S&P 500 is up 11 percent since July 10 after companies from Goldman Sachs Group Inc. to Mattel Inc. beat estimates, Bloomberg data shows per-share profits have dropped 27 percent on average for companies that reported since June 17. Companies have slashed costs by firing workers and reducing business expansion, leading them to beat analysts’ profit projections on a per-share basis by 9.9 percent while topping revenue expectations by only 0.2 percent.

Confidence Slumps

The Conference Board’s confidence index dropped to 46.6, a second consecutive decline, following a reading of 49.3 in June, a report from the New York-based group showed today. The figure reached a record low of 25.3 in February.

The government sold a record $42 billion of two-year notes, drawing a yield of 1.08 percent that was greater than the forecasted 1.058 percent compiled from a survey of eight of the Federal Reserve’s primary dealers that bid on the securities. Yields on the benchmark 10-year note fell 0.03 percentage point to 3.69 percent, according to BGCantor Market Data.

Office Depot plunged 18 percent, the most since January, to $4.38 for the steepest loss in the S&P 500. The company reported a second-quarter loss excluding some items of 22 cents a share, while the average estimate of analysts was a loss of 12 cents.

Coach retreated 1.3 percent to $28.05 and fell as much as 7.3 percent. The retailer said fiscal fourth-quarter sales declined 0.5 percent to $777.7 million, missing analysts’ estimates, as mounting job losses and declining home values discourage shoppers from purchasing non-necessities.

‘Limiting Optimism’

“What’s lacking is the confirmation of an economic recovery,” Jacques Porta, a fund manager at Ofi Patrimoine in Paris, which oversees about $615 million, said of earnings season. “That’s limiting optimism.”

Energy stocks slumped 1.5 percent as a group and were the biggest drag among the 10 main industries in the S&P 500. Oil retreated for the first time in four days, losing 1.7 percent to $67.23 a barrel as BP Plc Chief Executive Officer Tony Hayward said there is “little evidence” of a recovery in demand.

Energy Shares Slump

Valero Energy Corp. slid 2.4 percent to $18.32. The largest U.S. refiner posted its first second-quarter loss in a decade as the recession eroded fuel demand and plant shutdowns cut production.

National Oilwell Varco Inc. declined 2.4 percent to $36.55. Decreased customer spending on derricks and drill bits reduced the order backlog at the biggest maker of oilfield equipment, driving second-quarter profit down 48 percent.

Deutsche Bank’s U.S. shares had the biggest drop since April, sinking 10 percent to $66.32. The Frankfurt-based lender said it set aside 1 billion euros ($1.4 billion) for risky loans in the second quarter, exceeding the 634 million euro estimate of analysts. Deutsche Bank also predicted a further increase in private and corporate insolvencies.

Sprint Nextel Corp. and International Business Machines Corp. announced takeovers today. Sprint, the third-largest U.S. wireless carrier, said it will buy Virgin Mobile USA Inc. for $483 million, or $5.50 a share. IBM, the world’s biggest computer-services provider, said it will purchase SPSS Inc. for about $1.2 billion, or $50 a share, to gain analytics software.

Sprint gained 0.9 percent to $4.59, while IBM slipped 0.3 percent to $117.28.

Amgen, Textron Gain

Amgen Inc., the largest biotechnology company, rose 2.7 percent to $62.42 after earnings beat analysts’ predictions on lower research costs and increased sales of its arthritis drug Enbrel. Amgen also raised its full-year profit forecast.

Textron Inc. rallied 18 percent to $13.11 for the S&P 500’s biggest gain. The maker of Cessna aircraft and Bell helicopters said income, excluding special charges, was 8 cents a share, while analysts surveyed by Bloomberg had predicted a 1-cent loss.

Benchmark indexes slumped today even after a report showed home prices in 20 U.S. metropolitan areas fell less than forecast, a sign the market is stabilizing. The S&P/Case-Shiller home-price index dropped 17.1 percent in May from a year earlier, the smallest decline in nine months, following an 18.1 percent slide in April. The gauge rose from the prior month for the first time in almost three years.

Federal Reserve Bank of San Francisco President Janet Yellen said the economy is showing the “first solid signs” of emerging from the recession and should resume growth later this year.

‘Painfully Slow’

“That recovery is likely to be painfully slow” as consumers spend less and save more, Yellen also said in the text of a speech today in Coeur d’Alene, Idaho. “A gradual recovery means that things won’t feel very good for some time to come.”

The S&P 500 has rallied 45 percent from a 12-year low on March 9 on speculation the worst of the recession is over. The benchmark index for U.S. stocks plunged as much as 57 percent from its October 2007 peak as global financial firms racked up more than $1.5 trillion in losses and writedowns stemming from the collapse of the subprime mortgage market.

“This wonderful rally we’ve been having, 40 percent off the March lows, is going to correct itself,” Vince Farrell Jr., chief investment officer at Soleil Securities Group in New York, said in a Bloomberg Radio interview.

To contact the reporter on this story: Lynn Thomasson in New York at lthomasson@bloomberg.net.

Last Updated: July 28, 2009 16:42 EDT