FITB Fifth Third Bancorp

By Kate Gibson, MarketWatch

NEW YORK (MarketWatch) -- The U.S. stock market faces the heart of the fourth-quarter earnings season in the week ahead, with the bar substantially lowered for coming results and Europe's troubles in play.

"Entering the month of December we thought the fourth quarter would be a plus-15.3% and now we think it's going to be closer to 10.7%," Art Hogan, a strategist at Lazard Capital Markets, said of year-over-year earnings for S&P 500 companies.

"We know the fourth-quarter numbers were dramatically reduced over the last three months, but the early reporters, 31 companies on the S&P, have had one out of three that are missing estimates. We haven't seen that since the financial crisis back in '08," said Nick Raich, director of research at Key Private Bank in Cleveland.

"The majority will beat estimates, however the percentage beating is going to be less than it has been in the last three years," said Raich, who added: "There is a trickle of some of the problems in Europe."

On Friday, U.S. stock indexes finished higher for a second week. The gains were dented by session losses that came as euro-area governments readied for credit downgrades by Standard & Poor's that came after the close and after J.P. Morgan Chase & Co. (JPM) reported a profit drop.

After a 159-point fall, the Dow Jones Industrial Average (DJI) recovered the bulk of its decline to end at 12,422.06, down 48.96 points, or 0.4%. Up three of the past four weeks, the blue-chip index on Friday tallied a 0.5% weekly rise.

The S&P 500 (SPX) fell 6.41 points, or 0.5%, to 1,289.09, up 0.9% for the week. The Nasdaq Composite (RIXF) shed 14.03 points, or 0.5%, to 2,710.67, up 1.4% from the prior Friday's close.

The first major U.S. bank to report fourth-quarter results, J.P. Morgan, the nation's largest by assets, will be followed in the shortened week by others in its sector.

"It's going to be a very busy schedule of financial earnings reports, dominated by financial companies," said Lazard's Hogan.

U.S. financial markets are closed Monday for the Martin Luther King, Jr. holiday.

The line up

Those finance firms include Citigroup Inc. (C) and Wells Fargo Co. (WFC) on Tuesday; Goldman Sachs Group Inc. (GS) and U.S. Bancorp (USB) on Wednesday and Bank of America Corp. (BAC) and American Express Co. (AXP) on Thursday. Fifth Third Bancorp (FITB) and SunTrust Banks Inc. (STI)report results on Friday.

The financial sector is expected to have the highest earnings growth rate for the quarter, of nearly 70%, and contribute the most to S&P 500 dollar-level earnings growth. That's mostly from AIG's (AIG) forecasted swing to a profit from a large loss in the year-ago quarter, according to FactSet.

Aside from the banks, reports from some tech bellwethers are also scheduled -- including Intel Corp.(INTC), Microsoft Corp. (MSFT) and Google, Inc. (GOOG) on Thursday. And General Electric Co. (GE) has its results scheduled for Friday.

More than 40 S&P 500 firms report results in the coming week.

Up until this past Friday, the risk trade was back on, with materials, industrials and financials leading. "If they start to lower guidance after reporting, all those stock gains could be at risk," said Raich.

Europe overhang

But all could take a back seat to any new developments out of Europe.

"The policy makers have done a good job in Europe of preventing a banking crisis in the near term, by providing liquidity they bought themselves some time, but the market is not going to give them too much longer," said Raich.

A disorderly default by Greece, for instance, might trip credit default swaps, hitting the French banks that hold Greek bonds and the U.S. institutions that are counter-parties.

"We don't know the magnitude of those counter-party risks. It's a lightly regulated industry, so we don't know, that's the contagion risk, maybe it's not as big as we think, or maybe it's disastrous."

Barring some negative surprise, U.S. economic data in coming days is likely to be overshadowed by Europe and corporate results, with weekly jobless claims towards the end of the week likely to be the sole market mover.

"As long as we have the trend where the number stays below 400,000 and the unemployment rate doesn't start ticking up our impression of the jobs market is that it's improving," said Hogan.