Jan. 12 (Bloomberg) -- U.S. stocks fell, extending losses from the market’s worst week since November, as investors speculated earnings from commodity producers and banks will trail analysts’ estimates.

Alcoa, the aluminum producer that began profit reports among Dow Jones Industrial Average companies today, dropped 6.9 percent as Deutsche Bank AG recommended selling the shares. Alcoa reported earnings that missed forecasts after trading ended. Citigroup Inc. plunged 17 percent, the most in six weeks, on concern that plans to combine its brokerage unit with Morgan Stanley’s will crimp future earnings. ConocoPhillips fell 2.9 percent after crude sank below $38 a barrel on expectations demand will decrease amid the recession.

The Standard & Poor’s 500 Index slipped 2.3 percent to 870.26, extending its 2009 slump to 3.7 percent. The Dow average retreated 125.21 points, or 1.5 percent, to 8,473.97. The Russell 2000 Index slumped 2.6 percent. Stocks in Europe and Asia declined.

“The market is in the process of factoring in a worst-case scenario for earnings,” said Dan Veru, chief investment officer at Palisade Capital Management in Fort Lee, New Jersey, which oversees about $2 billion. “The companies that are going to miss will miss by a wide margin.”

The S&P 500 slumped 4.5 percent last week as companies from Alcoa to Intel Corp. and Wal-Mart Stores Inc. spurred concern earnings will deteriorate, while the unemployment rate in the U.S. climbed to the highest level in almost 16 years.

Earnings Slump

Profits for companies in the S&P 500 probably fell 20 percent in the fourth quarter of 2008, according to analysts’ estimates compiled by Bloomberg. That would mark the sixth straight period of declining earnings, the longest stretch on record. Income probably declined 65 percent at raw-materials producers and 53 percent at financials firms.

Alcoa lost 75 cents to $10.06. The shares slumped 11 percent last week after the company said it will cut 13 percent of its 107,000 employees and reduce capital spending by half. Deutsche Bank downgraded Alcoa to “sell” from “hold” and reduced its price estimate on the shares 20 percent to $8.

After the close of trading, Alcoa posted its first net loss in six years because of plunging prices and demand. Excluding some items, the loss was 28 cents a share, the company said. The average estimate in a Bloomberg survey of 14 analysts was for a per-share loss of 5 cents.

Raw-materials producers in the S&P 500 fell 3.6 percent collectively, and are down more than 45 percent over the past year.

Citigroup plunged $1.15 to $5.60 for the steepest drop in the Dow. Citigroup, which had to get $45 billion of rescue funds last year from the U.S. government, may book a gain of as much as $10 billion by selling control of its Smith Barney unit to Morgan Stanley, a person familiar with the talks said.

‘Attractive’ Prospects

While offering a short-term boost, the sale will mean Citigroup loses part of a business with “attractive long-term earnings prospects,” Gimme Credit LLC analyst Kathleen Shanley wrote in a note to investors. The cost of protecting Citigroup Inc. bonds from default rose to the highest in almost four weeks.

Citigroup spokesman Michael Hanretta declined to comment. Jim Wiggins, a spokesman for Morgan Stanley, didn’t return calls seeking comment.

Bank of America Corp. lost $1.56, or 12 percent, to $11.43. The lender that completed its purchase of Merrill Lynch & Co. earlier this month may post a $3.6 billion loss in the fourth quarter and slash its quarterly dividend, Citigroup analyst Keith Horowitz said.

JPMorgan Chase & Co. dropped $1.06, or 4.1 percent, to $24.91.

Credit Spreads

Financial shares in the S&P 500 slumped for a fourth straight day, losing 5.7 percent as a group, even as a gauge of money-market stress favored by former Federal Reserve Chairman Alan Greenspan fell to the lowest level since the collapse of Lehman Brothers Holdings Inc.

The Libor-OIS spread, the difference between the three-month London interbank offered rate, or Libor, for dollars and the overnight indexed swap rate, dropped to 98 basis points. The last time it closed below 100 basis points was Sept. 12, the final working day before Lehman filed for bankruptcy, causing credit markets to freeze worldwide.

“Everybody’s worried about more fallout in the financial system despite there being some signs of stability lately,” David Bianco, UBS AG’s New York-based chief equity strategist, said in an interview with Bloomberg Radio. “Investors are braced for one of the worst earnings seasons ever.”

S&P 500 energy shares declined 3.1 percent as a group as crude sank 7.8 percent to $37.65 a barrel in New York on concern production cuts by the Organization of Petroleum Exporting Countries will fail to counter a slump in demand. ConocoPhillips retreated $1.52, or 2.9 percent, to $50.47. Exxon Mobil Corp., the world’s largest oil company, slipped 1.3 percent to $76.54, while Chevron Corp. retreated 2.8 percent to $70.82.

Life Insurers Retreat

Hartford Financial Services Group Inc. and Prudential Financial Inc. led life insurers lower after regulators dismissed an industry plea to speed capital relief. Hartford had the second-steepest retreat in the S&P 500, falling 19 percent to $14.78 and Prudential declined 13 percent to $27.75.

Life insurers are pushing regulators to grant looser reserve standards after investment losses depleted capital across the industry. The National Association of Insurance Commissioners rejected an industry request to approve reform by Jan. 16 and plans to hold a hearing at the end of the month before taking a vote, Susan Voss, the vice president of the group, said late on Jan. 9.

Genworth Financial Inc., the life and mortgage insurer spun off by General Electric Co., dropped 13 percent to $2.59.

Slowing Demand

Harley-Davidson Inc. dropped 12 percent to $14.13. The biggest U.S. motorcycle maker was cut to “sell” at Goldman Sachs Group Inc. and added to the brokerage’s “conviction sell” list. Goldman slashed its price estimate on the stock to $11 from $30, citing slowing demand and the credit contraction.

Constellation Brands Inc. gained 25 cents, or 1.7 percent, to $15.14. The world’s largest winemaker reaffirmed its forecast for 2009 adjusted earnings of $1.68 a share to $1.72 a share and said it’s selling its value spirits unit to New Orleans-based Sazerac Co. for $334 million.

The S&P 500 was valued at less than 15.9 times earnings at the start of trading, the lowest since February 1991, Bloomberg data show. The gauge may rise to 1,110 by the end of the year, a gain of 24 percent from the Jan. 9 close, as government measures revive the economy and investors move from cash into equities, according to Nomura Holdings Inc. strategist Ian Scott.

The index has rebounded 16 percent from an 11-year low on Nov. 20 as investors speculated that President-elect Barack Obama will boost the world’s biggest economy with tax cuts, while the Federal Reserve slashed interest rates to as low as zero percent.

TARP Funds

Obama asked the Bush administration to notify Congress that he plans to seek the remaining $350 billion in financial-rescue funds, and Bush agreed to the request, White House spokeswoman Dana Perino said.

The request will trigger a 15-day period when Congress can vote to deny the release. It comes as Obama’s aides draft plans for broadening the program beyond the Bush administration’s focus on buying stakes in banks.

The changes, being coordinated with the Democratic majority in Congress, are likely to include a new initiative to stem mortgage foreclosures; some analysts also advocate removing assets from banks’ balance sheets and making further injections of capital into financial companies.

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

Last Updated: January 12, 2009 18:28 EST