Earnings key test as recession looms

By Jennifer Coogan

NEW YORK (Reuters) - As the earnings-reporting season for the first quarter kicks off next week, stock investors will be keenly assessing to what extent the slowing economy is taking a toll on Corporate America

First-quarter U.S. earnings estimates have fallen sharply since the period began as expectations for a recession have grown. Standard & Poor's 500 companies are now expected to show an 8.1 percent decline in earnings, down from analysts' projections at the beginning of the quarter for a 4.7 percent gain in earnings, according to Reuters Estimates.

In the most recent signal of economic weakness, a report released on Friday showed an unexpectedly large drop in jobs in March, marking the third straight month of contraction in the labor market.

"Even though the employment report was lousy, investors' minds were already wrapped in the fact that we're in the early stages of recession," said Fred Dickson, market strategist and director of retail research at D.A. Davidson & Co. in Lake Oswego, Oregon. "The attention's turning towards earnings and everyone will be holding their breath because it's one more dark cloud for investors to deal with."

Aluminum producer Alcoa Inc (AA.N: Quote, Profile, Research, Stock Buzz), the first Dow component to report for the quarter, will release its results after the closing bell on Monday. Conglomerate General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz), another Dow component and a bellwether for the economy, caps off the week, delivering its earnings on Friday.

Despite the drop in jobs on Friday and Federal Reserve Chairman Ben Bernanke conceding for the first time on Wednesday that the economy could slip into recession, the market still managed to end the week on a high note.

The S&P 500 .SPX gained 4.2 percent, the Dow .DJI added 3.2 percent and the Nasdaq .IXIC jumped 4.9 percent, its biggest weekly advance since August 2006. The bulk of the gains came on Tuesday, when Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz) put liquidity concerns to rest after it easily raised $4 billion in fresh funding.

"The important thing for the market right now is the raising of capital by some financial institutions. Even though write-offs may continue, the fear of collapses is less, so markets are reacting to that," said Subodh Kumar, chief investment strategist of Subodh Kumar & Associates in Toronto. "If the equity markets are able to hold financials at an even keel, that would be seen as a positive ahead of earnings."