Are U.S. stocks set for a down year?

Traders work on the floor of the New York Stock Exchange January 28, 2010.

NEW YORK (Reuters) - The adage 'as January goes, so goes the year' bodes ill for equity investors after the S&P 500 closed out its worst month in almost a year. In the coming week, they will have to contend with fears of sovereign defaults and the potential for unpleasant surprises in the U.S. labor market.

U.S. corporations have so far handily beat analysts' earnings forecasts. With heavyweights like Exxon Mobil Corp and United Parcel Service Inc set to report next week, investors will be looking for that to continue, going some way to offset the perception that political risk is on the rise.

The Standard & Poor's 500 Index fell 3.7 percent in January and is off nearly 7 percent from its high this month. Investors are worried that Greece's debt troubles may herald a wave of sovereign defaults in the euro zone that could derail an economic recovery.

"There's a lot of concerns going on as far as the sovereign debt is concerned in a lot of the nations, specifically in the euro zone," said David Lutz, managing director of trading at Stifel Nicolaus Capital Markets in Baltimore.

A heavy week for economic data will culminate in Friday's non-farm payrolls report. Analysts believe the economy added 5,000 jobs in January, according to a Reuters poll. Another negative surprise after the previous month's unexpected surge in job losses could roil markets.

"The next headline is going to be this unemployment data that is coming out, and there is no indication it is going to be moving in the direction in which we want it to move," said Jonathan Corpina, senior managing partner of Meridian Equity Partners in New York.

Friday's jobs number will be presaged by the ADP private- sector jobs report on Wednesday.

WILL MORE EARNINGS BEATS HELP?

Around 500 U.S. companies have reported quarterly earnings so far and of those, 73 percent have beaten earnings estimates, exceeding the 68 percent that beat in the last two quarters, according to data from Bespoke Investment Group.

But that positive earnings picture has not translated into gains for the stock market this time around.

Bespoke Investment Group's data shows the average stock of a company whose earnings beat estimates gained only 0.8 percent, compared with a 2.9 percent drop in those that missed.

"The companies beating aren't being rewarded by nearly as much as the companies that miss are being punished," Bespoke Investment said in its research note.

After consecutive quarters when better-than-expected earnings helped drive stocks up more than 66 percent from last year's lows, fourth-quarter numbers may have already been factored into the market.

Highlights in the second full week of earnings will include Exxon Mobil on Monday, which is the first of a number of energy companies reporting, as well as delivery service UPS on Tuesday. UPS, viewed as a window on the economy's health, raised its profit forecast earlier this month.

Exxon is expected to post earnings per share of $1.19, while UPS is seen reporting 73 cents per share.

EYES ON THE ECONOMY

The U.S. economy grew at its fastest pace in more than six years in the fourth quarter of 2009, expanding at an annual pace of 5.7 percent -- much more than most economists had expected.

There will be an early indication of the sustainability of growth when the Institute for Supply Management releases its manufacturing report for January. Economists in a Reuters poll are expecting a reading of 55.2, showing an expanding sector for the sixth straight month.

That will be followed by the ISM's service sector survey on Wednesday, expected to edge into growth mode after the largest segment of the U.S. economy struggled to find its footing in the fourth quarter of last year.

"The economy is showing no signs of a self-sustaining recovery," said David Wright, portfolio manager at Sierra Core Retirement Fund in Santa Monica.

"Essentially the fuel was used in sustaining the rally as far as it did, and we are now beginning a down cycle that I expect to be prolonged and severe."

For the final week of January, the S&P 500 slid 1.7 percent, while the Dow Jones industrial average declined 1.1 percent and the Nasdaq Composite Index fell 2.6 percent.

For the month of January, the blue-chip Dow average dropped 3.5 percent -- close to the S&P 500's 3.7 percent decline -- and the Nasdaq lost 5.4 percent.

If this January is anything to go by -- and the Stock Trader's Almanac shows only six major occasions since 1950 when January's performance has not been an indicator for the rest of the year -- Wright's prediction may come true.

(Reporting by Edward Krudy; Additional reporting by Chuck Mikolajczak and Ellis Mnyandu; Editing by Jan Paschal)