Jan. 11 (Bloomberg) -- U.S. stocks fell as lower-than- estimated profit forecasts at American Express Co. and Tiffany & Co. heightened concern the economy is shrinking and sent the Standard & Poor's 500 Index to its worst start since 1982.

Treasury Secretary Henry Paulson's warning that growth slowed ``rather materially'' at the end of last year also pushed down benchmark indexes. American Express, the third-largest U.S. credit-card network, dropped the most since 2001 on a projection for first-quarter earnings that trailed analysts' estimates by 3.2 percent. Tiffany, the second-biggest luxury jewelry seller, had its steepest decline in more than three years after holiday sales growth shrank to 8 percent.

The S&P 500 slipped 19.31, or 1.4 percent, to 1,401.02. The benchmark for U.S. equities dropped for a third straight week, the longest streak since August. The Dow Jones Industrial Average decreased 246.79, or 1.9 percent, to 12,606.3. The Nasdaq Composite Index retreated 48.58, or 2 percent, to 2,439.94. About seven shares declined for every two that rose on the New York Stock Exchange.

``There was this perception that the upper-end consumer was resistant to the economy, and that may be starting to roll over,'' said Matthew Kaufler, who helps manage $2.6 billion at Clover Capital Management in Rochester, New York. ``Housing has been in recession, the financial institutions are also feeling it, and now you have signs that the consumer is starting to buckle. We seem to be in a rolling recession.''

Profit Forecasts

The earnings outlooks at American Express and Tiffany follow a warning yesterday from Capital One Financial Corp. that profit trailed its forecast as more borrowers failed to repay debts. The S&P 500 has fallen 4.6 percent this year, led by technology and consumer companies, amid concern that falling home values and more defaults will stifle consumer spending, which accounts for about two-thirds of the economy.

The S&P 500 extended its decline today to as much as 1.8 percent and the Dow average fell as much as 2.4 percent after Paulson said the U.S. economy slowed at the end of 2007, and any stimulus package should be put into effect quickly. He spoke in an interview on Bloomberg Television's ``Political Capital with Al Hunt'' to be aired this weekend.

The Dow average lost 103 points yesterday before recovering after Federal Reserve Chairman Ben S. Bernanke signaled he may cut interest rates further and investors speculated Countrywide Financial Corp. would be bought.

Three-Quarter Point

Traders placed bets for the first time today that the central bank will reduce its benchmark interest rate by 0.75 percentage point this month, according to Fed funds futures prices compiled by Bloomberg. Countrywide fell after Bank of America Corp. agreed to buy the mortgage lender for less than its market value.

The S&P 500 declined 0.8 percent this week, bringing its year-to-date loss to 4.6 percent. That's the most for the first eight days of a year since 1982. The Dow average slipped 1.5 percent this week. The Nasdaq tumbled 2.6 percent and posted its biggest three-week decline since October 2002.

American Express dropped $4.92, or 10 percent, to $44. The company said it will take a fourth-quarter charge of $275 million to cover rising customer defaults. First-quarter earnings from continuing operations will be less than 90 cents a share, American Express said. That trailed the 93-cent average estimate of 12 analysts surveyed by Bloomberg.

Capital One, the largest independent U.S. credit-card issuer, declined 33 cents to $42.59. MasterCard Inc., the second- biggest credit-card network, lost $16.82 to $179.17 for its eight straight slump.

Tiffany Falls

Tiffany fell $4.52, or 11 percent, to $35.80. Holiday sales at U.S. stores open at least a year retreated 2 percent, while analysts predicted an increase. Total sales from Nov. 1 to Dec. 31 rose 8 percent after climbing 15 percent in 2006. Tiffany reduced the top end of its profit forecast for the full year to $2.28 a share, from $2.30, excluding some items. Thirteen analysts expected profit of $2.28, on average, Bloomberg data show.

``Both American Express and Tiffany are exposed to the consumer,'' said Sam Rahman, who manages about $500 million in U.S. equities at Baring Asset Management Inc. in Boston. ``This is an indication that the consumer is softening, along with concerns in the market that the economy is weakening.''

Coach Inc., the largest U.S. luxury leather-goods maker, retreated $2.02 to $26.85. Harley-Davidson Inc., the country's biggest motorcycle maker, lost $1.77 to $39.84. Apple Inc., maker of the iPod media player, slipped $5.33 to $172.69 in Nasdaq trading. The stock has retreated 13 percent this year after climbing 133 percent in 2007.

Best Buy Drops

Best Buy Co. dropped $2.37 to $44.20 after the largest U.S. consumer-electronics chain said same-store sales growth in December slowed to 1.5 percent from 7 percent a year ago. A gauge of consumer companies in the S&P 500 lost 2.5 percent to the lowest since August 2004.

Countrywide declined $1.42 to $6.33. Bank of America, the biggest U.S. bank by market value, agreed to buy Countrywide for about $4 billion, five months after making a money-losing $2 billion investment in the biggest independent U.S. mortgage company. Countrywide shares rose more than 50 percent yesterday, valuing the company at $4.48 billion.

Bank of America declined 80 cents to $38.50 today. Robert Shiller, Yale professor of economics and co-creator of the S&P/Case-Shiller Home Price indexes, said the falling U.S. housing market may cut the value of Countrywide.

Housing Risk

``There's a tendency for people to underappreciate the risk of the housing market,'' Shiller said in an interview with Bloomberg Television. ``I might have a lower valuation of Countrywide than Bank of America does.''

Trading in equity options surged to a record 93.8 million contracts this week, 9.8 percent more than the prior peak curing the week of Nov. 5, according to the Chicago-based Options Clearing Corp., which settles all trading of exchange-listed contracts.

McDonald's Corp., the world's largest restaurant company, dropped $3.85, or 6.6 percent, to $54.32 for the biggest decline since May 2003. A franchisee survey indicated U.S. same-store sales may have increased at their slowest pace since a turnaround in 2003. Thirty-one franchisees who operate 195 U.S. restaurants told consultant Richard Adams that December sales by outlets open at least 13 months advanced 1.8 percent.

Procter & Gamble Falls

Procter & Gamble Co., the largest consumer-products company by market value, declined $2.30 to $70.18. Morgan Stanley analysts downgraded shares of London- and Rotterdam-based Unilever, the second-biggest consumer-products maker, saying earnings growth may be constrained by commodity prices. P&G forecast full-year profit that trailed analysts' estimates in October because of higher commodity expenses.

Juniper Networks Inc., the second-largest maker of computer- networking equipment, fell the most since January 2006 after the resignation of Chief Operating Officer Stephen Elop, who helped lift sales and earnings. Elop, 44, left after one year to join Microsoft Corp., the world's biggest software maker. Juniper shares declined $4.07, or 13 percent, to $26.60.

RF Micro Devices Inc. dropped $1.29, or 26 percent, to $3.73 for the biggest drop since June 2002. The maker of chips and radio systems for mobile phones said sales and earnings missed its forecasts because Asian customers cut back orders. Technology shares in the S&P 500 fell 2 percent as a group, extending their drop this year to 9.5 percent.

Profits Fall

Fourth-quarter profit at S&P 500 members probably fell 10 percent from a year ago as earnings at financial companies dropped 69 percent, according to analysts' estimates compiled by Bloomberg today. That would be the worst quarter for S&P 500 companies since 2001 and the second straight earnings decline.

More than 30 members of the S&P 500 are scheduled to report quarterly results next week, according to Bloomberg data.

Citigroup Inc., the largest U.S. bank by assets, gained 45 cents to $28.56. Investors speculated Saudi Prince Alwaleed bin Talal, who owned 4 percent of the company as of June, may raise his investment, traders said. Analysts at two investment banks predicted today that Citigroup may report a writedown next week of up to $16 billion to cover losses on its mortgage-related assets.

``To counter the bad news, it's said Prince Alwaleed may increase his position and invest up to another $15 billion,'' said Michael Mainwald, head of equity trading at Lek Securities Corp. in New York.

Washington Mutual, JPMorgan

Washington Mutual Inc. climbed 53 cents to $14.69. JPMorgan Chase & Co., the third-biggest U.S. bank, may be interested in buying the largest U.S. savings and loan, CNBC on-air editor Charlie Gasparino reported, without citing anyone specific. JPMorgan slipped 47 cents to $40.86. A JPMorgan spokesman declined to comment. Washington Mutual spokeswoman Libby Hutchinson didn't return a call.

Bear Stearns Cos. added $2.47 to $79.90. The fifth-largest U.S. securities firm was upgraded to ``buy'' from ``neutral'' by Merrill Lynch & Co. analyst Guy Moszkowski, who cited a low price for the stock relative to the company's assets. Moszkowski wrote that the shares may climb to $103.

The U.S. trade deficit widened more than forecast in November as Americans spent a record amount on imported oil, overshadowing gains in exports. The gap between imports and exports grew 9.3 percent, the most in two years, to $63.1 billion from $57.8 billion in October, the Commerce Department said today. The shortfall with China shrank.

Fed funds futures contracts on the Chicago Board of Trade are for the first time pricing in that the Fed will cut its 4.25 percent target rate for overnight bank loans to 3.50 percent by Jan. 30. The probability is 32 percent for a cut of 0.75 percentage point and the balance of the odds is for a half- percentage-point cut.

Fed Speakers

Fed Governor Frederic Mishkin said in prepared remarks to a New York Fed bank seminar today that policy makers will act ``decisively'' on interest rates to offset risks to economic growth posed by financial-market distress.

Fed Bank of Boston President Eric Rosengren said the decline in U.S. house prices may lead to weaker consumer and business spending. The drop in residential investment ``has heightened the risk of a more significant downturn in the overall economy,'' Rosengren said in a speech in South Burlington, Vermont.

Philadelphia Fed President Charles Plosser said he'll ``certainly'' consider additional interest-rate cuts after consumer spending slowed more than he expected. He spoke in an interview with PBS television's Nightly Business Report.

Recession Odds

Most economists surveyed by Bloomberg News this month predict the U.S. economy will avoid a recession. Growth will average 1.5 percent in the first six months of 2008, matching the fourth quarter's pace, according to the median estimate of economists. There was a 40 percent chance a recession would occur in the next year, according to the survey median.

Economists at Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co., the biggest U.S. securities firms, all have predicted a U.S. recession this year.

Treasuries rose today, pushing yields down for a fourth straight week, on speculation losses from subprime mortgages will increased demand for the relative safety of government debt. The dollar rose against the euro.

The Russell 2000 Index, a benchmark for companies with a median market value of $525.6 million, fell 2.2 percent to 704.65. The Dow Jones Wilshire 5000 Index, the broadest measure of U.S. shares, decreased 1.4 percent to 14,042.54. Based on its decline, the value of stocks dropped by $253.3 billion.

To contact the reporter on this story: Michael Patterson in New York at mpatterson10@bloomberg.net.

Last Updated: January 11, 2008 18:06 EST