By Sue Chang, MarketWatch
SAN FRANCISCO (MarketWatch) -- Investors are expected to increasingly focus on company news next week as U.S. corporations enter the earnings-reporting cycle. But Europe won't be far from their minds as the continent's sovereign debt woes show little sign of abating.
"Attention is certain to turn to earnings next week. Investors will attempt to quantify the extent of earnings damage from the economic turmoil in Europe," said Bill Stone, chief investment strategist of PNC Asset Management Group.
U.S. stocks kicked off 2012 on a positive note as Europe temporarily took a back seat to relatively decent U.S. economic data. The Dow Jones Industrial Average (DJI) rose 1.2% for the week. The S&P 500 (SPX) climbed 1.6%, while the Nasdaq Composite (RIXF) jumped 2.7% for the week.
Investors will have to temper their optimism as the main theme for fourth-quarter earnings -- and possibly for most of 2012 -- is about lowered expectations, according to analysts.
"Earnings growth is almost certain to show a slowing pace, but should still be able to reach a high single-digit pace for the fourth quarter....Analyst growth expectations have also been drifting lower for the fourth quarter, so that provides a lower hurdle to jump," Stone said.
Companies in the S&P 500 are expected to show fourth-quarter earnings per share rose 11.4% year-over year. That's down from a 16% annual increase in the third quarter, according to John Butters, senior earnings analyst at FactSet Research.
Over the last three months, those fourth-quarter projections have been reduced from nearly 19%, says Butters, with materials, telecoms and financial sectors taking the biggest hits.
Revenue growth is expected to have slowed to 7.1% in the fourth quarter, compared with 11% in the third quarter.
Alcoa (AA) will cut the tape to launch the unofficial earnings season late Monday when it releases fourth quarter results. The aluminum company is expected to report a loss of a penny a share and revenue of $5.76 billion in the latest quarter, according to FactSet's poll of analysts. In the year-earlier period, Alcoa earned 21 cents a share on revenue of $5.6 billion.
Alcoa's weaker results will hardly be a surprise following a steep drop in aluminum prices. The company said late Thursday that it will close smelters as part of its effort to scale back its smelting capacity and improve competitiveness in the wake of a 27% drop in aluminum prices from their peak in 2011.
J.P. Morgan Chase (JPM), which is scheduled to report Friday, is expected to announce a smaller profit than the year ago, or earnings of 95 cents a share, according to a consensus survey by FactSet. In the fourth quarter of 2010, the bank reported earnings of $1.12 a share.
But even as corporate earnings take center stage in the next few weeks, the potential for Europe to steal the show is a constant threat.
Investors know what to expect from earnings while Europe is still a huge question mark, noted Jim Sinegal, associate director of equity research at Morningstar. And that uncertainty could amplify the impact that Europe has on the market, he said.
On Monday, French President Nicolas Sarkozy will meet with German Chancellor Angela Merkel in Berlin to discuss preparations for a summit of European Union leaders at the end of January.
On Thursday, the European Central Bank is expected to hold interest rates steady when it holds its monetary policy meeting.
"After the ECB decided to adopt comprehensive quantitative easing measures at its last meeting, it looks set to remain on hold at Thursday's meeting. Looking ahead, however, the ECB is likely to keep the door open to all options," said Michael Schubert, an economist at Commerzbank, in a report.
It is also shaping up to be a busy week for economic data.
On Monday, the Federal Reserve will release November consumer credit data, followed by U.S. wholesale inventories for November on Tuesday. The Federal Reserve's Beige Book is slated for Wednesday with December retail sales due on Thursday.
But the one data that most investors are likely to study more than others is the weekly jobless claims number on Thursday.
"In a quarter where potential for surprises from the corporate side is limited, investors will be looking at data for hints that we are managing to overcome economic difficulties," said Sinegal.
Aside from the troika of earnings, Europe and data, investors will also look to Las Vegas where the Consumer Electronics Show will pitch its tent. A host of technology companies, including Qualcomm (QCOM), Microsoft Corp. (MSFT), Intel Corp. (INTC), Nvidia Corp. (NVDA), and Samsung Electronics, may unveil new products and discuss their latest innovations.