By Deepa Seetharaman
NEW YORK (Reuters) - With Wall Street in the middle of an earnings free fall, investors will eye any moves from the White House next week to revive banks and craft a recovery plan to salvage the economy from its year-long recession.
Investors also will tune in to the Federal Open Market Committee's statement from the meeting on Tuesday and Wednesday for any clues on how the Federal Reserve will address these problems.
Next week, 137 companies in the S&P 500 and 12 Dow components will report earnings, in what's expected to be the weakest in this six-quarter streak of negative growth.
Banks in particular will be in focus as news that President Barack Obama and his economic advisers will meet on Saturday fueled hopes that the new administration will put together another rescue package for the ailing banking sector.
The progress of the $825 billion economic recovery package being crafted in Washington will also be closely observed. On Friday, President Obama urged lawmakers to act swiftly, saying the United States was experiencing "an unprecedented economic crisis."
"For investors, a lot is riding on the upcoming stimulus plans," said Michael Sheldon, chief market strategist at RDM Financial in Westport, Connecticut.
Data on home sales, jobless claims and a reading on the fourth-quarter U.S. gross domestic product next week will likely confirm Obama's viewpoint.
Still, the path is likely to be anything but smooth for the economic recovery program, cautioned Craig Peckham, equity trading strategist for Jefferies & Co in New York.
"It's a long road from here to there," he said "It is far from being a unanimously supported platform."
MORE EARNINGS GLOOM
Earnings from McDonald's Corp
But corporate profits are expected to drop 28.1 percent during this earnings season, ThomsonReuters data shows, with seven of the S&P 10 sectors expected to see double-digit declines.
This is in line with bleak economic data expected on existing home sales, new home sales and weekly jobless claims.
An advance reading of the U.S. fourth-quarter GDP is expected to show contraction at an annual rate of 5.4 percent -- far worse than the previous quarter's 0.5 percent decline.
"This is a very bad number and probably the worst number in 26 years," said John Praveen, chief investment strategist at Prudential International Investments Advisors in Newark, New Jersey.
Among those scheduled to report earnings next week are American Express
Banks have been at the core of the credit crunch, which sparked a slump in consumer spending, the backbone of the U.S. economy.
This week, losses in the financial sector were a major stumbling block for Wall Street. Just a week ago on Friday, Bank of America
For the week, the Dow lost 2.5 percent, the S&P 500 slid 2.1 percent and the Nasdaq fell 3.4 percent.
For the month of January and 2009 so far, the Dow is down 8 percent, the S&P 500 is off 7.9 percent, and the Nasdaq is down 6.3 percent.
WINDOW ON THE FED'S MOOD
Investors will look to the Fed's language for signs on how it will help the broader economy now that its main tool for directing monetary policy, the fed funds rate, will likely remain unchanged at a range of zero to 0.25 percent. The Fed's statement is expected on Wednesday at about 2:15 p.m.
"The focus will be on the statement to get a flavor for what they are thinking about the possibility of purchasing more mortgage paper or buying up other assets in the financial markets," Praveen said.
And Wall Street will continue to keep a close eye on drama surrounding the economic stimulus package. President Obama launched a drive on Friday to get his recovery plan through Congress, predicting lawmakers would resolve differences before a February 16 deadline.
"The devil is in the details. The market wants to know that we're not just going to create government jobs," said Bobby Harrington, head of block trading at UBS in Stamford, Connecticut.
"On the longer-term perspective, people are going to want a combination of things -- not just to build a bunch of windmills that helps short term, but doesn't have sustainability."
(Additional reporting by Rodrigo Campos, Leah Schnurr and Chuck Mikolajczak; Editing by Jan Paschal)
