"Caution is definitely the operative word as Europe and China look to continue dragging on earnings," said Michael Loewengart, director of investment strategy at E-Trade Financial in New York. "The overall tone is so pessimistic that we may see some upside surprises, but we could still suffer considerable losses if the news is bad."
Profits of S&P 500 companies are seen dropping 3 percent this quarter from a year ago, the first decline in three years, hurt by China's slowing growth and Europe's debt crisis, which recently prompted the International Monetary Fund to cut its 2012 economic growth outlook.
Financial stocks will be especially in focus, with Bank of America Corp , Citigroup Inc , Goldman Sachs Group Inc and Morgan Stanley all set to report.
Results on Friday from JPMorgan Chase & Co and Wells Fargo & Co generated some caution about the group despite both reporting stronger-than-expected profits. Wells Fargo posted disappointing revenue and a bigger drop in net interest margin than had been anticipated.
Wells Fargo shares slumped 2.6 percent to $34.25 while JPMorgan lost 1.1 percent to $41.62 despite bullish commentary about the housing market.
"We need to see big banks doing well, and JPMorgan or Wells didn't give us the boost we were hoping for," said Wayne Kaufman, chief market analyst at John Thomas Financial in New York. "Citigroup is the one we're looking for. If profits come in worse than expected there, that would make me more bearish about the economy in general."
FEWER COMPANIES BEAT THE STREET
With only 6 percent of S&P 500 companies having reported, 59 percent of companies have topped profit expectations - less than the average beat rate of 67 percent for the past four quarters, according to Thomson Reuters data. Half of companies have beaten on revenue, while a quarter missed profit forecasts.
"We need to see the beat rate pick up well into the 60s if we want the market to have any support," Kaufman said.
The S&P 500 fell 2.2 percent this week, its biggest weekly percentage drop since June, on caution about the season after a number of bellwethers cautioned on their outlooks, including Chevron Corp and Alcoa Inc .
Profits are being dragged down by material and energy stocks. Material sector earnings are seen dropping 24 percent, and energy sector results are expected to slide 19 percent.
In contrast, aggregate profit growth for financials is seen up 1.6 percent.
Trading could be especially volatile in the Nasdaq, with a number of tech titans on tap, including Microsoft, Google Inc , IBM and Intel Corp , which recently cut its outlook.
"Tech results can be a good proxy for business spending, which will give us a sense of how companies are viewing the future," said John Carey, portfolio manager at Pioneer Investment Management in Boston.
Carey, who helps oversee about $200 billion in assets, said outlooks were still too optimistic, "so I've pulled in my horns a bit, and have become more defensive."
BLUE CHIPS, GREECE AND DATA
McDonald's Corp , UnitedHealth Group and Johnson & Johnson are also scheduled to report earnings, along with General Electric, which E-Trade's Loewengart said would be particularly watched, given the company's diversified operations.
Trading will also be influenced by the news flow in Europe, where a summit of finance ministers will take place. The Wall Street Journal reported that a deal on austerity measures for Greece could be reached in time for the meeting.
In the realm of U.S. economic data, investors will look ahead to reads on retail sales, the Consumer Price Index and existing home sales. September retail sales are seen rising 0.8 percent, while the overall CPI for September is expected to gain 0.5 percent, and September existing home sales are forecast to fall 2 percent, according to economists polled by Reuters.
(Wall St Week Ahead runs every Friday. Questions or comments on this column can be emailed to: ryan.vlastelica(at)thomsonreuters.com ) (Editing by Jan Paschal)