Stocks eye earnings for economic clues

By Leah Schnurr

NEW YORK (Reuters) - Even as credit market strains show signs of easing, a barrage of earnings will steal the spotlight this week as Wall Street looks for a picture of how profits will fare in the face of a severe economic slowdown.

Stock investors will pay close attention to any guidance that comes out of earning season as they shift their focus from uncertainty about a recession to how long a downturn could last and how big a bite it could take out of the bottom line.

When New York trading resumes on Monday, it will be the day after the anniversary of the 1987 stock market crash that happened on October 19, known as "Black Monday." On that date, the Dow fell a record 22.6 percent -- its largest one-day percentage decline ever.

This October, the Dow is down about 38 percent from its record closing high set about a year ago on October 9, 2007.

This week, Wall Street also will watch for whether overnight borrowing costs will continue to ease, signaling that attempts by global authorities to unlock frozen credit markets are taking hold.

"Importantly, there will be statements made by companies about the prospects for business," said Hugh Johnson, chief investment officer of Johnson Illington Advisors, in Albany, New York.

"We know that the third quarter was a disaster and the question is: 'What's happening in the fourth quarter and beyond?'"

Some analysts are anticipating that companies will need to cut their forecasts, highlighting that deteriorating growth could continue longer than had been expected.

"The current outlook needs to be adjusted, and it's being adjusted in one direction -- and that's down," said Owen Fitzpatrick, head of the U.S. equity group at Deutsche Bank Private Wealth Management, in New York.

Market watchers got a taste of earnings season last week, with results from bellwethers such as Google (GOOG.O: Quote, Profile, Research, Stock Buzz), Honeywell (HON.N: Quote, Profile, Research, Stock Buzz) and Intel (INTC.O: Quote, Profile, Research, Stock Buzz).

On Monday, September's index of leading U.S. economic indicators will kick off a fairly light week for data. Wednesday's weekly mortgage market index, Thursday's weekly U.S. claims for jobless benefits and Friday's report on September U.S. existing home sales will be scrutinized for signs of further weakness in the housing and job markets.

NUMBERS NOT BAD, BUT NOT GREAT

Analysts said that while corporate results overall have not been fantastic, they weren't as dire as had been feared. They are expecting to see more of the same this week as earnings season picks up steam.

Among the heavy hitters set to release earnings this week are Caterpillar Inc (CAT.N: Quote, Profile, Research, Stock Buzz), 3M Co (MMM.N: Quote, Profile, Research, Stock Buzz), Boeing Co (BA.N: Quote, Profile, Research, Stock Buzz), and McDonald's Corp (MDC.N: Quote, Profile, Research, Stock Buzz) -- all Dow components. In the tech sector, Apple Inc (AAPL.O: Quote, Profile, Research, Stock Buzz), Yahoo Inc (YHOO.O: Quote, Profile, Research, Stock Buzz), Amazon.com Inc (AMZN.O: Quote, Profile, Research, Stock Buzz) and Microsoft Corp (MSFT.O: Quote, Profile, Research, Stock Buzz) are scheduled to report. These are among the most prominent companies listed on the Nasdaq.

"I would say earnings are not going to be great, but they're not going to be as bad as some of the rumors and fears that were going around last week," said Al Kugel, chief investment strategist at Atlantic Trust in Chicago.

Kugel added that the earnings have provided the backdrop to tempt some bargain hunters back into the market as some buyers start to think that worse results have already been priced into stocks.

At Friday's close, U.S. stocks finished the session lower after a volatile session.

But for the week, stocks rose. The blue-chip Dow Jones industrial average .DJI rose 4.75 percent, its best gain in 5-1/2 years, while the Standard & Poor's 500 Index .SPX gained 4.59 percent, for its best week since February. The Nasdaq Composite Index .IXIC advanced 3.75 percent for the week.

FOLLOW THE MONEY

But analysts said earnings will not entirely run the show, as attention will still be paid to short-term credit markets to see whether recent moves by global central banks to stimulate lending are working.

Major global money rates fell on Friday, underscoring hope that authorities' maneuvers have started to thaw the frozen credit markets.

Overnight borrowing costs for dollars, euros and sterling funds, reflected in the London interbank offered rate, eased, but longer-term lending rates remained high.

A sense that central banks have been able to stop the fallout from the credit crisis that is more than a year old now would return some confidence to a market that has been battered by the fear of more casualties to come.

Analysts said rampant volatility will remain the hallmark of the markets after the record-setting surge last week in the barometer of investor fear, the Chicago Board Options Exchange Volatility Index, also known as the VIX .VIX.

The three major U.S. stock indexes have swung in a wide range every day as investor sentiment has vacillated from one minute to the next.

In addition to existing home sales and the sprinkling of other economic reports this week, investors also will keep their eyes on the Fed.

On Monday, Federal Reserve Chairman Ben Bernanke is scheduled to testify at a House Budget Committee hearing about the economic outlook and the financial markets.