By Nick Godt

The market will begin the peak period for quarterly earnings reports next week, as evidence grows that the economic pain is being felt across an ever-broadening range of industries.

At the same time, there's hope the government will announce a plan to cope with the banking crisis.

"We're waiting to see what's going to come out of Washington to solve the banking crisis [and eventually] to stimulate the economy," said Hugh Johnson, chairman of Johnson Illington Advisors.

Wall Street and owners of financial stocks fear that the government might seize ailing banks, getting rid of their bad assets and making a profit where possible, while wiping out their shareholders.

However, many now believe the plan from the new Obama administration will be limited to buying banks' toxic assets, the very same ones which have brought the financial system and the global economy to its knees over the past year and a half.

On Friday, stocks finished mostly higher, partly lifted by those expectations.

The broad S&P 500 index (SPX) rose 4 points to 831, and the Nasdaq Composite (RIXF) gained 11 points to 1,477. The Dow Jones Industrial Average (DJI), however, fell 45 points to 8,077, weighed down by bad quarterly results from General Electric (GE), a bellwether of the global economy.

And after a week full of disappointing results and dimming outlooks, the Dow finished 2.5% lower than last Friday's close, while the S&P 500 fell 2.1%, and the Nasdaq lost 3.4%.

Next week, 137 companies from the S&P 500 are expected to report results, including 12 Dow components: American Express (AXP), Caterpillar (CAT) and McDonald's (MCD) on Monday; Dupont (DD) and Verizon (VZ) on Tuesday; Boeing (BA), Pfizer (PFE) and AT&T (T) on Wednesday, 3M (MMM) on Thursday; followed by Chevron (CVX), Exxon Mobil (XOM) and Procter & Gamble (PG) on Friday.

Bad bank

Government plans to try and fix the banking crisis once and for all, while not officially on the agenda, will likely continue to be the number one factor for investors.

Some in the market even expect such a plan might be announced over the weekend.

"Most of the focus will be on that," said Johnson. "Then investors will ask themselves: Will it work? Is this big enough, effective and creative enough?"

Expectations are that the government might create an aggregator "bad bank" that would buy all the toxic assets, mostly bad home loans and their associated financial derivatives, from troubled financial institutions.

The move would fall short of what the government did in the 1980s, when it seized ailing savings and loans banks, which wiped out their shareholders but allowed the government to make money by the time the banks were sold to new owners.

Earnings pain spreads

Meanwhile, evidence that pain has spread far beyond the ailing financial sector was amply displayed over the past week.

Overall earnings at S&P 500 companies are now expected to have fallen 28.1% in the fourth quarter from the year earlier, compared with forecasts for a drop of 20.2% last week, and of 15.1% two weeks ago, according to Thomson Financial.

Earnings at financial firms, including regional banks such State Street (STT) and U.S. Bancorp (USB) and mega-banks such as Bank of America (BAC) and Citigroup (C) have widely missed estimates.

As a sector, financials earnings are expected to have plunged a whopping 300% from the year earlier. Analysts had expected year-on-year comparisons to become easier as banks began to declare bad assets in the fourth quarter of 2007.

But the theme of the fourth quarter is that pain is now spreading far beyond financials as global economic weakness takes its toll, according to John Butters, earnings analyst at Thomson.

"In past quarter, this was mostly the financials," he said. "But now, 7 out of the 10 S&P sectors are seeing year-on-year declines."

The materials sector is next in line, with earnings there expected to have dropped 72% from the year earlier, amid a collapse in the price of most commodities. The consumer discretionary is next, with earnings there expected to be down by 62%. And although the ailing auto industry is mostly responsible for the weakness of that sector, retailers have now joined the pack.

The health-care, consumer staples and utilities sectors are the only sectors expected to see any growth in the quarter, with earnings in these sectors seen rising 6%, 3%, and 1%, respectively.

And earnings projections for the rest of the year remain murky, at best, and worsening in many cases. Earnings are expected to drop 20.2% in the first quarter, and to be down 18.2% in the second quarter.

"The outlook for the economy is extremely uncertain," said Johnson of Johnson Illington Advisors. "The consensus is that the economy would start to recover in the third quarter, but no CEO out there wants to hang their hat on that forecast."

Economy

An update on the depth of the recession will be provided Friday, with the advance estimate of fourth-quarter gross domestic production.

Ahead of this, December existing home sales and leading indicators will be released Monday, followed by the November S&P Case-Shiller Home Price Index, and the Conference Board's latest reading on consumer confidence on Tuesday.

On Thursday, investors will monitor weekly jobless claims for the latest on the ailing labor market, along with reports on December new home sales and durable goods orders.

Friday will bring a reading of manufacturing in the Chicago region and another consumer survey from the University of Michigan.

No joy at the Fed

The Federal Reserve will also meet Tuesday and Wednesday. But the meeting is unlikely to garner as much attention as in other times, with interest rates already standing practically at zero.

"For the first time since the credit crisis broke, one thing is for certain: the Fed won't cut rates any further, given the target range of 0% to 0.25%," said Sal Guatieri, senior economist at BMO Capital Research.

The central bank, he said in a note, will likely commit to keeping rates at these exceptionally low levels for as long as needed, while employing other tools to provide credit to businesses and individuals.

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