June 17 (Bloomberg) -- U.S. stocks fell for a third straight day after Standard & Poor’s downgraded the credit ratings of 18 banks, overshadowing gains in health-care shares as Congress prepares legislation to overhaul the industry.

Wells Fargo & Co. and KeyCorp slid more than 5.3 percent after S&P said operating conditions for banks will become “less favorable.” General Electric Co. tumbled 4.2 after its vice chairman predicted a few more “difficult months” for some businesses. FedEx Corp. lost 1.4 percent on a forecast for earnings that may be less than half analysts’ estimates.

“There are continuing jitters about where the global economy sits at the moment, and things aren’t as good as people hoped they would be,” said E. William Stone, who oversees $100 billion as chief investment strategist at PNC Wealth Management in Philadelphia. “FedEx is just another piece of the puzzle because you can’t say we have visibility on a recovery.”

The S&P 500 lost 0.1 percent to 910.71 at 4:05 p.m. in New York after sinking 3.6 percent in the prior two days, the most since April. The Dow Jones Industrial Average slipped 7.49 points, 0.1 percent, to 8,497.18. The Nasdaq Composite climbed 0.7 percent to 1,808.06 as analyst upgrades of Texas Instruments Inc. and Qualcomm Inc. triggered gains in technology shares. About ten stocks fell for every nine that rose on the New York Stock Exchange.

Health-care stocks led the market higher earlier as Democratic leaders advanced legislation that would require all Americans to have health insurance and make employers provide benefits to workers or pay a penalty. The overhaul may be hammered out with unprecedented speed at the urging of President Barack Obama, who four days ago said “this is the moment.”

‘Engines of the Economy’

While Obama said “you’re starting to see the engines of the economy turn,” in an interview with Bloomberg News late yesterday, he also said a full recovery will “take a long time” and the jobless rate may continue to climb.

The president in January inherited the worst financial calamity since the 1930s as the collapse of the subprime- mortgage market spurred almost $1.5 trillion in losses and writedowns at banks worldwide. The S&P 500 plunged 38 percent in 2008, the most for a year since 1937.

Wells Fargo, the fourth-largest U.S. bank, lost 5.4 percent to $23.09. KeyCorp, Ohio’s second-largest bank, tumbled 7.8 percent to $5.46. BB&T Corp., also one of the banks to be downgraded by S&P, slipped 2.9 percent to $21.58.

The KBW Bank Index tumbled 3.3 percent, the most in three weeks, to extend this year’s drop to 20 percent as 23 of its 24 companies fell.

‘New Reality’

“Financial institutions are now shedding balance-sheet risk and altering funding profiles and strategies for the marketplace’s new reality,” S&P credit analyst Rodrigo Quintanilla said in a statement today. “Such a transition period justifies lower ratings as industry players implement changes.”

General Electric, the world’s biggest maker of aircraft engines and medical-imaging equipment, slid 4.2 percent to $12.25 after its vice chairman predicted a few more “difficult months” for those businesses.

“I’m just not one of the green-shoot guys yet,” Vice Chairman John Rice said in an interview today at the Paris Air Show. “Our customers are still worried about credit markets and getting financing for everything they want to buy: hospitals in the U.S., airlines globally. I think we’re in for a few more difficult months.”

‘Extremely Difficult’

FedEx fell 1.4 percent to $50.70 after citing an “extremely difficult” economy for a disappointing earnings forecast. Earnings for the period ending in August will be 30 to 45 cents a share, FedEx said today, compared the 70-cent average of 11 estimates compiled by Bloomberg. The company didn’t provide a full-year outlook.

“Transportation is a good leading indicator for the economy because it gives us a sense of the level of orders that were just placed,” said Diane Garnick, who helps oversee $391.3 billion as investment strategist at Invesco Ltd. in New York. “If transportation continues to be as negative as it is now, valuations in the equity market might be looking pricier.”

United Parcel Service Inc., FedEx’s larger rival, retreated 0.7 percent to $48.12. The Dow Jones Transportation Index of 20 companies, often used as a proxy for the economy’s outlook, slumped 0.3 percent.

‘Extraordinarily Weak’

Mosaic Co., North America’s second-largest fertilizer maker, slumped the most since March 2 after German rival K+S AG said it expects a “further significant reduction in revenues and earnings” this year, citing continued “extraordinary weak demand” for potash fertilizers.

Mosaic tumbled 9.7 percent to $46.25. Potash Corp. of Saskatchewan Inc., the world’s largest maker of its namesake crop nutrient, slipped 11 percent to $95.59.

The cost of living in the U.S. rose less than forecast in May, culminating in the biggest 12-month drop in prices in almost 60 years. The consumer price index increased 0.1 percent after no change a month earlier, the Labor Department said. In the 12 months ended in May, costs dropped 1.3 percent, the biggest decline since 1950.

“We got excited that it wasn’t going to be the Great Depression, and now we’re in a normal recession, but there’s so much that still needs to be worked out,” said Ron Sweet, who helps oversee $100 billion as vice president of equity investments at USAA Investment Management Co. in San Antonio. “There’s still quite a bit of uncertainty out there.”

E*Trade Tumbles

E*Trade Financial Corp. slid the most in seven weeks, dropping 12 percent to $1.46. The online brokerage that’s lost money for seven consecutive quarters said it will sell $400 million in stock to investors including hedge fund Citadel Investment Group LLC and exchange debt to cut interest expenses.

Pfizer, the world’s biggest drugmaker, rallied 3 percent to $14.58. Johnson & Johnson, the largest maker of health-care products, added 1.1 percent to $55.20. All but two of 52 health- care stocks in the S&P 500 advanced.

Watson Pharmaceuticals Inc. rallied after the second- largest U.S. maker of generic drugs said it agreed to buy closely held Arrow Group for $1.75 billion. Watson added 5 percent to $30.27.

The Senate Finance Committee may delay consideration of the health-care overhaul until July as lawmakers work to bring the cost below $1 trillion and reach a bipartisan compromise, panel Chairman Max Baucus said.

Baucus, a Montana Democrat, told reporters today he still believes the Senate can pass a plan next month. He previously said he hoped his committee would approve a measure next week, before Congress’s July 4 recess. “It’s too soon to say when we’ll be ready,” Baucus said.

Qualcomm, Texas Instruments

Qualcomm Inc. gained 3.8 percent to $45.09. The world’s biggest maker of mobile-phone chips said third quarter sales will be at least $2.4 billion, beating the average analyst estimate of $2.35 billion. The shares were added to the “conviction buy” list at Goldman Sachs Group Inc.

Texas Instruments Inc. gained 3.3 percent to $21.41, the highest since October. The second-largest U.S. semiconductor maker was upgraded to “buy” from “underperform” by Bank of America Corp., which said the semiconductor maker’s margin expansion will be “well above” analysts’ expectations.

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.

Last Updated: June 17, 2009 16:35 EDT