By Leah Schnurr
NEW YORK (Reuters) - Even as credit market strains show signs of easing, a barrage of earnings will steal the spotlight next 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.
Wall Street also will be watching 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 this week, with results from bellwethers such as Google
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 haven't been fantastic, they weren't as dire as had been feared. They are expecting to see more of the same next week as earnings season picks up steam.
Among the batch of heavy hitters to release earnings next week are Caterpillar Inc
"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.
FOLLOW THE MONEY
But analysts said earnings won't 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's 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 this 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.
(Wall St Week Ahead runs weekly. Questions or comments on this column can be e-mailed to: leah.schnurr(at)thomsonreuters.com)
(Reporting by Leah Schnurr; Additional reporting by Ellis Mnyandu; Editing by Jan Paschal)
