U.S. Stocks Slump Amid Europe Concern as Gap Tumbles on Profit

U.S. stocks retreated, giving the Standard & Poor’s 500 Index its third weekly decline, amid concern that Greece will default on its debt and as Gap Inc. (GPS)’s profit forecast fell short of analysts’ estimates.

Chevron Corp. (CVX) and Exxon Mobil Corp. (XOM) dropped more than 1 percent as a stronger U.S. dollar sent oil prices lower. Gap tumbled 17 percent after the largest U.S. apparel chain cut its full-year profit forecast by 22 percent after costs to make clothes rose faster than expected. Aeropostale Inc. (ARO) slumped 18 percent as its profit projection trailed analysts’ estimates.

The S&P 500 fell 0.7 percent to 1,334.83 at 11:53 a.m. in New York, extending its weekly drop to 0.2 percent. The Dow Jones Industrial Average declined 86.77 points, or 0.7 percent, to 12,518.55 today. The euro fell after Greece’s credit rating was cut one notch by Fitch Ratings, which said that even a voluntary restructuring of the country’s debt being discussed by European Union policy makers would be considered a default.

“Investors are turning more defensive,” said Walter Todd, who helps manage $950 million at Greenwood Capital Associates in Greenwood, South Carolina. “The market had been ignoring some risks for a while. There’s no getting around in having to restructure Greece’s debt, whether you want to call that a default or not. Bondholders will have to take some type of hit. On top of that, we got some bad prints in U.S. data. Volatility will be on the rise.”

Corporate Earnings

The S&P 500 rose 6.8 percent in 2011 through yesterday amid higher-than estimated earnings and government stimulus measures. Profits at S&P 500 companies that have reported results since April 11 have expanded 20 percent, with 72 percent topping analysts’ estimates for per-share earnings, according to data compiled by Bloomberg.

The euro weakened, snapping a four-day gain versus the dollar, after Fitch cut its Greece rating to B+, four notches below investment grade, from BB+ and said that the country could face a further reduction in its creditworthiness.

“The rating downgrade reflects the scale of the challenge facing Greece in implementing a radical fiscal and structural reform program necessary to secure solvency of the state and the foundations for sustained economic recovery,” Fitch said in an e-mailed statement.

German Economy

Earlier today, the European currency also fell as the Bundesbank said Germany’s economy will probably lose growth momentum. Germany’s 1.5 percent growth rate in the first quarter “considerably overstates the underlying economic momentum,” the Frankfurt-based Bundesbank said.

Chevron fell 1.1 percent to $102.72, while Exxon Mobil lost 1 percent to $81.48. Oil retreated as the dollar rose, reducing the appeal of commodities as an alternative investment.

Gap tumbled 17 percent to $19.31. Expenses per unit will rise 20 percent in the second half, outweighing price increases, Gap said. The apparel industry is facing cost inflation for the first time in two decades because of surging cotton prices and increased pay for workers who make clothes in China and other parts of Asia. Retailers have said they plan to raise prices to counter the higher costs.

“While we acknowledge that costing pressure is impacting our business, we’re working hard to navigate this short-term macro challenge to our profitability in the current fiscal year,” Chairman and Chief Executive Officer Glenn Murphy said in the statement.

Aeropostale slumped 18 percent to $17.41. The teen- clothing retailer forecast second-quarter profit of no more than 16 cents a share, below the average analyst estimate of 27 cents a share.

“There’s concern that we’re sliding backward a bit,” said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia, which manages $1.5 billion. “Some retailers missed earnings estimates and cited higher costs. We got some weak figures, including housing yesterday.”

To contact the reporter on this story: Rita Nazareth in New York at rnazareth@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net

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