Jan. 8 (Bloomberg) -- U.S. stocks slid for a second day after retailers from Wal-Mart Stores Inc. to Limited Brands Inc. said profit will trail forecasts as the recession limited holiday spending and sent continuing jobless claims to a 26-year high.

Wal-Mart tumbled as much as 9.4 percent, the most in a year. Limited and Gap Inc. slid more than 5 percent as weakening earnings outlooks at the clothing chains spurred concern that President-elect Barack Obama’s $775 billion spending plan won’t prevent the economy from shrinking this year. Benchmark indexes pared losses as Tesoro Corp. led energy shares higher and banks rebounded on Citigroup Inc.’s agreement with three U.S. senators to help millions of homeowners keep their houses.

The Standard & Poor’s 500 Index fell 0.4 percent to 902.8 at 3:17 p.m. in New York and is little changed in 2009. The Dow Jones Industrial Average declined 89.12 points, or 1 percent, to 8,680.58. After falling more than 50 percent from its November record, the VIX, which measures the cost of using options as insurance against declines in the S&P 500, was little changed after climbing 13 percent yesterday.

“Things look really, really bleak right now,” said Tom Wirth, senior investment officer at Chemung Canal Trust Co. in Elmira, New York, which manages $1.4 billion. “We knew the fourth quarter was absolutely horrid and now we’re getting confirmation of that. Between now and mid-spring, I think we’re going to see the market in flux and not making much progress.”

Earnings Slump

Stocks fell on three of four days this week as the recession forced the biggest U.S. companies to acknowledge that forecasts made last year were too optimistic. The five-quarter slump in profits at S&P 500 companies is projected to last two full years before a rebound in the second half of 2009, according to analyst estimates compiled by Bloomberg.

The S&P 500 has slumped 39 percent since the start of 2008 amid more than $1 trillion in credit losses and writedowns at financial firms worldwide and the first simultaneous recessions in the U.S., Europe and Japan since World War II.

Wal-Mart, whose shares climbed 18 percent last year for the best gain in the Dow, slid as much as $5.23 to $50.31 today. The retailer cut its fourth-quarter earnings forecast and said January revenue may be little changed after customers balked at discounts on flat-panel televisions, $7.50 jeans and microwave ovens for $43.

‘Disillusioning’

“Over the last 10 years, Wal-Mart has become a kind of hero, or Teflon, stock and to see it get beat up like everyone is disillusioning to investors,” said Jonathan Vyorst, senior vice president at New York-based Paradigm Capital Management Inc., which oversees about $1.3 billion.

Macy’s and Gap also lowered their earnings forecasts as the worst holiday-shopping season in 40 years squeezed retail profit margins. Macy’s fell as much as 57 cents to $10.74, while Gap lost 71 cents to $12.85.

Limited slumped 7 percent to $9.95. December sales fell 10 percent and the retailer slashed its fourth-quarter profit projection to as little as 55 cents a share from a previous range of 85 cents to $1.

Wal-Mart led a group of consumer-staples companies including tobacco producers, food companies and makers of household goods in the S&P 500 to a fourth daily slump, falling 1.5 percent collectively. The group was last year’s best performing industry in the index with an 18 percent drop.

S&P 500 retailers will likely say profits decreased 32 percent in the fourth-quarter and 20 percent in the current quarter, according to analysts polled by Bloomberg.

Profit Estimates

Earnings at S&P 500 companies have fallen for five straight quarters, matching the longest streaks of declines on record, and the slump is forecast to continue. According to estimates compiled by Bloomberg, profits probably decreased 12 percent last quarter and will drop 11 percent in the first quarter and 6.2 percent in the following three months before rebounding in the second half of the year.

Sun Microsystems Inc. sank 9.4 percent to $4.61, the most since Nov. 24. The server maker was added to Goldman Sachs’s Americas “sell” list. The brokerage also lowered its share- price projection and 2009 earnings estimate, citing a “more challenging” first half of 2009 ahead.

Concern that global stock losses will deepen remains elevated. The VIX, as the Chicago Board Option Exchange Volatility Index is known, yesterday had its biggest intraday gain since Dec. 1 and climbed as much as 2.8 percent today.

Sears Rallies

Sears Holdings Corp. surged 23 percent to $49.99 for the biggest gain since 2004. The largest U.S. department-store chain said it expects fourth-quarter earnings per share, excluding items, of $2.44 to $3.09, above the consensus estimate of $1.92.

Thinkorswim Group Inc. rallied 49 percent to $8.39. TD Ameritrade Holding Corp., the No. 3 U.S. online brokerage by assets, agreed to acquire the online brokerage and investor education company in a cash and stock deal valued at about $606 million. The offer values Thinkorswim at $8.71 a share, 54 percent higher than yesterday’s close.

Stocks opened lower after the total number of people receiving unemployment benefits rose to 4.6 million, the most since 1982, the Labor Department said, even as initial jobless claims unexpectedly fell by 24,000 to 467,000 in the week that ended Jan. 3. A report tomorrow will show the U.S. lost jobs for a 12th straight month in December, economists forecast.

The jobless-claims report came before Obama delivered a speech on the economic outlook in a bid to build support for his stimulus plan. Obama warned that the U.S. risks sinking deeper into an economic crisis without an infusion of government spending and urged Congress to act quickly on a stimulus package.

‘Potential and Promise’

In a speech directed at lawmakers and the public, Obama drew a portrait of a nation where family income is falling, the unemployment rate is rising and a “generation of potential and promise” may be lost without federal action.

The Bank of England cut its benchmark interest rate to the lowest since the central bank was founded in 1694 as policy makers tried to prevent the credit squeeze from deepening Britain’s recession. The bank rate was reduced a half-point to 1.5 percent.

The S&P 500 yesterday slid the most since Dec. 1, erasing most of its 2009 gain, as a private report showed employers cut more jobs than estimated in December and companies from Alcoa Inc. to Intel Corp. spurred concern the profit outlook is worsening. The gauge has rebounded more than 20 percent since Nov. 20 on optimism the recession will end this year after the Federal Reserve cut interest rates to as low as zero and Obama proposed the largest infrastructure investment since the 1950s.

The difference between what the U.S. government and banks pay to borrow for three months, the so-called TED Spread, is still about three times higher than before credit markets started freezing in August 2007, according to data compiled by Bloomberg.

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

Last Updated: January 8, 2009 15:41 EST