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Week Ahead: Challenging -- At The Least

A double helping of economic data and first quarter earnings reports will flood the zone next week, but it's the corporate earnings that will drive stocks and give a better picture of where the economy is going.

If General Electric's bombshell earnings miss is an indicator, the earnings news will be as nasty as traders expect. Thomson Financial says earnings for the S&P 500 are estimated to decline by 14.1 percent for the first quarter. (But if the financial companies are excluded from that equation, earnings would be up 6.4 percent.)

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The coming week is a perfect storm of economic reports and, for the most part, none are expected to be terribly positive. Retail sales, inflation and housing data are on the list -- but the market will likely ignore most of that and turn its attention to the earnings.

"You're kind of getting a glimpse of what we're going to see in the next couple of weeks if you use GE as the precursor for earnings," said Art Hogan, chief market strategist at Jefferies and Co. (Note: GE is the parent of CNBC.)

"The shock value of having a Dow component miss that never misses is adversely affecting a market that was up three percent last week. You've got some profits to give back in the short term," Hogan said Friday.

GE reported profits per share of 44 cents, well below analysts' expected 51 cents per share and reduced its forecast for the year. The majority of the first-quarter miss resulted from problems with assets in its financial business, which cropped up at the end of March -- just as Bear Stearns melted down.

"The difficult part is, how does the market react for the rest of the S&P 500? I would venture to guess it's not going to be that shocking," Hogan said. GE, he says, may actually have been the biggest shocker of the quarter.

Axis of Evil!

Bank of America's Chief Market Strategist Joseph Quinlan expects the market to trend "sideways with a downward bias" as earnings get underway. "If there's any up days, we're not going to get too excited," he said.

I called Quinlan after I read a note he wrote saying there's an "axis of evil" threatening corporate earnings. He cited the first of three big worries as the faltering consumer and waning confidence.

"While cheap credit and soaring home values allowed U.S. consumers to super-size just about everything -- their homes, cars and meals -- the process is now working in reverse," he wrote.

"We don't think U.S. consumer spending is about to go into a deep freeze. However, we do think consumer expenditures will expand at below-trend pace over the medium-term, at a 1-2 percent annual pace, maintaining earnings pressure on a host of U.S. companies."

His second big concern? Rising raw material costs hitting profit margins. He says the combination of rising commodity costs and weak consumer spending is "a toxic brew" that will put downside pressure on earnings for the rest of the year.

I asked Quinlan if he thinks oil's current high price was factored into Street thinking, and he said he believes a price of $98 to about $102 is in the mix, but above that for any length of time would be problematic. (Oil closed at $110.14 per barrel Friday, a gain of 3.7 percent for the week.)

"If we're heading in the other direction towards $115 (per barrel) that could be a kind of dampening effect on the mood in the markets and CEO guidance. ...It's still very high and it's a burden, but if we're heading high to $115, $118, it's going to affect input costs and we'd see a drag on consumer confidence," said Quinlan.

And the third issue: the deceleration of global economic growth.

"I still think the global component will be healthy. I think the first quarter of the year will be strongest in terms of global growth," he said, adding that he expects the global economy will start to follow the U.S. downhill in the second and third quarters.

According to Bank of America data, corporate domestic profits declined three percent in 2007, but overseas profits rose 17 percent. Global profits were a record 33.3 percent of the total in fourth quarter, up from 28.7 percent the year earlier and 27 percent the year before that.

Quinlan says the result of all this will be more negative surprises and an earnings period that "is among the most challenging in years." Ouch.

But all of this doesn't mean stocks can't pull off a halfway decent performance by year-end. (Stress the halfway.)

"I still think the S&P could be up five or six percent. Two things -- you wash out all this bad news related to the financial sector. You get all the writedowns... and No. 2, if there is a recession that's mild and it doesn't take us into 2009, I really do think by the third quarter, this market will get a better tone," Quinlan said.

Market Mayhem

GE's historic miss and big stock decline dragged the market sharply lower.

The Dow lost 256 points Friday, or 2 percent, giving it a 2.3 percent decline for the week. GE was down 13 percent, its biggest one-day decline in percent terms since Oct. 19, 1987. The S&P was off 27 points, or 2 percent Friday, giving it a 2.7 percent loss for the week. The Nasdaq lost 61 points or 2.6 percent Friday and ended the week 2.7 percent lower.

The dollar fell 0.6 percent against the euro for the week and 0.7 percent against the yen. It finished Friday at $1.5828 per euro. Treasurys gained on the week, as yields fell. The two-year was yielding 1.742 percent Friday, and the 10-year was yielding 3.471 percent.

Earnings Central

As you've heard, earnings news promises to be fast and furious in the week ahead. Financial firms, drug companies and big tech names are all among the companies that report earnings in the week ahead.

The ones that will get the most scrutiny promise to be in the financials, the sector at the heart of the credit crunch. But the bad news is expected to come from that group. So traders, in fact, may be more scared if other sectors' big names miss their estimates.

State Street and US Bancorp report Tuesday; JPMorgan and Wells Fargo are Wednesday; Merrill Lynch , CIT , TD Ameritrade , PNC and Bank of New York report Thursday, and Citigroup and Wachovia are Friday.

Big tech names include Intel , which reports Tuesday after the bell. EBay and IBM both report Wednesday afternoon, and Google releases results Thursday after the bell.

Johnson and Johnson reports Tuesday; Abbott Labs reports Wednesday and Pfizer reports Thursday. Other names to watch include Coca-Cola on Wednesday morning; United Technologies on Thursday and Caterpillar on Friday.

In other corporate news, the markets are watching a few possible mergers. The Microsoft-Yahoo saga continues. Yahoo mulls its options with Google , Time Warner's AOL and its own recap of sorts, while Microsoft threatens from the sidelines. News Corp. is at play with Microsoft, but there is some thinking that News Corp. would not be part of a Yahoo bid, but a partner brought in by Microsoft later.

Northwest Airlines and Delta Air Lines appear to be moving closer to a merger as pilots work out their issues.

Econorama

We will get a very good rear-view picture of the economy in the week ahead and we'll see what the Fed will have to consider when it meets at the end of the month.

Retail sales data for March is released Monday, and it should mirror those weak chain-store sales we saw in the past week. Inflation data in the form of producer prices is reported Tuesday and consumer price data is released Wednesday. News on the housing front includes the National Association of Home Builders survey, released Tuesday afternoon and March housing starts, due Wednesday morning.

The Fed's Beige Book on the economy is reported Wednesday at 2pm.

Other data includes business inventories, due Monday at 10am, the Empire State survey for April, released Tuesday, and industrial production, reported Wednesday. On Thursday, initial weekly jobless claims are reported at 8:30am, and the Philadelphia Fed survey and leading indicators, both at 10am.

The Treasury's report on international capital flows is released Tuesday at 9am.

What Else to Watch

The G-7 wraps up ahead of the weekend but the IMF continues to meet. On Monday, European Central Bank President Jean Claude Trichet speaks at an afternoon event at New York University. Fed Governor Kevin Warsh also speaks at the NYU School of Law's event Monday afternoon. On Wednesday, San Francisco Fed President Janet Yellen speaks on the economic outlook at 11:45am in San Francisco and Philadelphia Fed President Charles Plosser speaks about education at a community college in Blue Bell, Pa. at 12:30am.

On Thursday, Fed Vice Chairman Donald Kohn speaks on the changing business of banking and implications for financial stability at the Federal Reserve Bank of Richmond's two-day credit market symposium. Kohn speaks at 9:45am and will take questions from the audience.

Questions? Comments? marketinsider@cnbc.com

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