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It's earnings vs Europe for stocks

By Ryan Vlastelica

NEW YORK (Reuters) - U.S. stock investors will return to a tug of war between signs of domestic strength and overseas concerns this week as a batch of critical earnings reports look to add credence to the idea the economy is improving, while credit rating downgrades in Europe will keep that region's difficulties in view.

Bank stocks will probably once again be a primary focus, as not only will European issues call the group's profit outlook into question, but many key names report results.

Equities have recently undergone a decoupling with respect to Europe's sovereign debt crisis as signs of progress in the euro zone, along with improving U.S. data, have pushed Wall Street higher on improved growth prospects. Financials have been a beneficiary of that rising tide, with Bank of America up about 20 percent since the start of the year.

So far this month, the S&P 500 <.SPX> is up 2.5 percent, while the Dow <.DJI> is up 1.7 percent and the Nasdaq <.IXIC> is up 4.1 percent.

"We're going to see more volatility in the weeks ahead with tension between earnings and Europe," said Christopher Sheldon, the Boston-based director of investment strategy at BNY Mellon Wealth Management, which oversees $171 billion globally.

"We want to see Europe resolved, but there will continue to be ups and downs, and while earnings will continue to be relatively good, we do expect slowing compared with 2011."

However, the uncertainty about Europe returned in a big way on Friday after Standard & Poor's downgraded the ratings of nine of the 17 euro-zone countries, including France, Italy and Spain after the market closed. Talk of the downgrades spurred a selloff that erased most of the gains for the week, when the S&P rose for four straight sessions.

The downgrades could exacerbate the euro zone's difficulties and bring concerns about how they might affect U.S. banks' profits back to the forefront.

Still, market participants looking for signs of strength don't have to look far. Data has been bullish lately, including Friday's consumer sentiment reading at an eight-month high that sharply exceeded what was anticipated.

"The prospect of a downgrade has been around for a while, so despite today's reaction, everyone was aware of the potential, and I don't think it will be as impactful, especially as corporate business trends remain strong," said Hank Herrmann, chief executive of Waddell & Reed Financial Inc in Overland Park, Kansas.

HINTS OF BETTER TIMES AHEAD

Earnings reports from numerous bellwethers could reinforce the growth story. Bank of America Corp , General Electric Co , Intel Corp , Goldman Sachs Group Inc and Microsoft Corp are among the names set to report.

Early reads have supported the idea that better times lie ahead. JPMorgan Chase & Co said the domestic economy was strengthening even as its profit fell 23 percent, while Alcoa Inc rallied earlier in the week after giving a bullish outlook for the aluminum sector.

"Banks will be an important part of the story, especially with Europe in the picture, and investors will also be looking at names like GE, which have global exposure, to see what insights can be gleaned from that," said Herrman, who helps oversee $90 billion in assets.

The U.S. stock market will be closed on Monday in observance of the U.S. holiday honoring the birthday of the Rev. Martin Luther King Jr., the slain civil rights leader.

When trading resumes on Tuesday, Wall Street will watch a number of economic indicators to gauge the strength of the recovery. Data scheduled for release in the abbreviated week includes the New York Fed's Empire State Index on January manufacturing, the December readings on the U.S. Producer Price Index and the Consumer Price Index, as well as December housing starts and December existing home sales.

For the past week, the Dow rose 0.5 percent while the S&P 500 gained 0.9 percent and the Nasdaq added 1.4 percent.

(Wall St Week Ahead runs every Sunday. Questions or comments on this column can be emailed to: ryan.vlastelica(at)thomsonreuters.com)

(Reporting by Ryan Vlastelica; Editing by Jan Paschal; Multimedia versions of Reuters Top News are now available for: * 3000 Xtra: visit http://topnews.session.rservices.com * BridgeStation: view story .134 For more information on Top News: http://topnews.reuters.com; For London stock market outlook please click on <.L/O>; Pan-European stock market outlook <.EU/O>; Tokyo stock market outlook <.T/O>)

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