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Two Most Important Company Earnings This Week

When investors think banks and technology, they think Bank of America and Google.

With 43 constituents of the Standard & Poor's 500 reporting quarterly results in the coming week, most of them financial and technology companies, Bank of America and Google could end up being the most important earnings reports to watch on Thursday.

That's because Bank of America's report will give investors the most realistic view of the troubled areas of the U.S. bank system, while Google will offer key insights into how the European debt crisis is affecting technologies companies that derive a big chunk of revenue from the region.

Analysts expect Bank of America to post earnings of 21 cents a share, according to Zacks Research. A poll of analysts by Thomson Reuters has the number a bit higher at 23 cents a share on revenue of $24.1 billion.

By comparison, the bank reported earnings of 4 cents a share on revenue of $22.4 billion in the year-ago quarter.

Investors, however, will have to look Bank of America's earnings and revenue and the year-earlier comparisons to get a better hold on mortgage issues and other problems plaguing the U.S. bank system.

"Bank of America is important because it's just so big," says Tom Villalta, manager of the Jones-Villalta Opportunity Fund. "Bank of America is going to give you a much better window on what is happening in the U.S., which you won't get from a broader technology name that is disproportionately affected by the global economy."

Villata says that while JPMorgan Chase gave investors a good sense of the health of U.S. financial companies, Bank of America's insights on loan loss provisions, loan quality and the bank's mortgage portfolio will be critical to watch.

"It gives you a more general sense of U.S. economic help," says Villalta, who owns shares of Bank of America in his fund. "They have the biggest mortgage portfolio and then there are the legal liability. We want some color on the mortgage putbacks and litigation surrounding that. We want to know what they're putting aside for that."

In terms of market-moving surprises from Bank of America, Villalta says that any big news from the bank will likely be related to the legal liabilities the bank faces over its Countrywide unit and its mortgage problems.

"The stock has done well so far this year but there is significant overhang," Villalta says. "That legal overhang will be with us for a while. We want to see some sort of sign they have a handle on it and that they're working in the best interests of shareholders."

Meanwhile, several big-name technology companies will be out with quarterly numbers this week, including Dow components Intel and International Business Machines.

"The high-profile names are the ones that will be the ones people talk about," says Channing Smith, portfolio manager of the Capital Advisors Growth Fund. "We're going to be trying to glean any type of information we can about Europe."

While many of the U.S. bank stocks derive much of their revenue domestically, there are U.S. technology companies that see most of their revenue flow from outside of the U.S. For that reason, Smith says investors should watch what technology companies say for clues on the global economy.

Google, in particular, is a good report to watch in order to understand exactly how Europe is doing.

"Gaining insight on trends management and companies see out of Europe is important," Smith says. "We haven't seen it show up in the earnings yet, though. Europe is very important to tech company earnings. I think Google is a good proxy for that."

Google may report a quarterly profit of $10.48 a share and revenue of $8.4 billion, according to Thomson Reuters.

"With Google, you never know what to expect from the earnings," Smith says, explaining how investors are often surprised by Google's results. "You've seen big moves both ways. We expect there to be weakness. Our opinion is that Europe is much worse than people think. We expect an impact there."

Smith isn't alone. Two analysts recently downgraded Google, with one citing a slowdown in Europe and potentially in the U.S.

"One of the key things the market needs to figure is that how deep the recession will be in Europe," Smith says. "With the tech sector having considerable exposure to Europe, going forward, if Europe somehow avoids recession, that would be very bullish for the market."

However, if investors glean information that things are worse than expected in Europe, especially with business and consumer spending falling off, that changes the trajectory of everything.

The argument made so far this year is that the U.S. is decoupling from the rest of the world. With what Google's report could show, Smith isn't buying that argument.

"That's lazy analysis," Smith says of the decoupling argument. "You can't now say that the U.S. has decoupled. It's simply not true. If demand is slowing around the world, Europe will be impacted and China will be impacted. Everything is in a merry-go-round. It will catch up. There will be an impact."

He adds, "There may be a lag, but it will show up in results at some point. It may not be this quarter, but you will eventually see it if there is weakness."

Additional News: Bank of America Ponders Pulling Out of Some Areas

Additional Views: Google's Cash Hoard 'Astonishing' Given Costs: Analyst

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