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S&P 500 Caps Longest Losing Stretch Since August on Europe Woes

U.S. Stock-Index Futures Retreat as Gap, Aeropostale Tumble
Gap Inc sank 16 percent after the largest U.S. apparel chain cut its full-year profit forecast by 22 percent as costs to make clothes rose faster than expected. Photographer: JB Reed/Bloomberg

May 20 (Bloomberg) -- U.S. stocks slumped, capping the longest weekly losing streak since August for the Standard & Poor’s 500 Index, amid concern Greece will default on its debt and as Gap Inc.’s profit forecast missed estimates.

Banks had the biggest decline in the S&P 500 within 24 industries today, falling 2.2 percent after Greece’s credit rating was cut by Fitch Ratings, which said that even a voluntary debt restructuring would be considered a default. Gap tumbled 17 percent as the largest U.S. apparel chain cut its full-year earnings forecast by 22 percent after costs to make clothes rose faster than expected. Aeropostale Inc. slumped 14 percent as its profit projection trailed analysts’ estimates.

The S&P 500 sank 0.8 percent to 1,333.27 at 4 p.m. in New York and fell 0.3 percent since May 13 for a third straight weekly loss. The Dow Jones Industrial Average declined 93.28 points, or 0.7 percent, to 12,512.04 today.

“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 has risen 6 percent in 2011 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 snapped a four-day gain versus the dollar as 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.

Financial companies led the declines in the S&P 500. The KBW Bank Index slumped 1.8 percent as 23 of its 24 stocks fell.

BB&T Corp. dropped 2.8 percent to $26.56. JPMorgan Chase & Co. retreated 2 percent to $43.13.

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.

“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. “We’ve got some weak global figures. In the U.S., some retailers missed earnings estimates and cited higher costs.”

Gap tumbled 17 percent, the most since 2001, to $19.22. 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.

Cost Pressures

“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 fell 14 percent to $18.30. 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.

Autodesk Inc. dropped 4.6 percent to $42.35. The maker of software used in bridge design and movie special effects said that, excluding some items, it expects to earn 37 cents to 41 cents a share in the second quarter. Analysts, on average, estimated profit of 40 cents, according to a Bloomberg survey.

Barnes & Noble Inc. soared 30 percent to $18.33. Liberty Media offered $17 a share, a 20 percent premium to yesterday’s closing price, Barnes & Noble said in a statement. A board committee will evaluate the proposal, which is subject to an accord and to shareholder and regulatory approvals.

Barnes & Noble, facing increasing competition as more consumers buy electronic readers such as Amazon.com Inc.’s Kindle, hired Lazard Ltd. last year to explore a sale. Barnes & Noble makes the Nook e-reader, and some potential bidders balked at a purchase because of how long it may take the chain to generate more digital sales, two people said last month.

Salesforce.com Inc. advanced 8 percent to $146.61. The largest supplier of customer-management software forecast fiscal second-quarter sales and profit that topped estimates as the company added clients.

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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