European stocks, trading near two-month lows, will take direction from a flood of results next week, including from the oil and gas sector, even as inflation fears stoke worries of higher interest rates.
Early trends from third-quarter results show a mixed picture for profits, and investors will now eye earnings from chipmaker STMicroelectronics, BP, Deutsche Bank GlaxoSmithkline and DaimlerChrysler.
The pan-European FTSEurofirst 300 index looked set to end with a weekly loss of about 2 percent, down about 5 percent from a 41-month high of 1,242.2 struck this month.
"What's happening at the moment is we are getting a big shakeout in the small and big cap names where long-only funds are making large excess profits," said Kevin Lilley, a European equities fund manager at Royal London Asset Management.
"It's just a bit of a retracement. We are not back at the bottom of the upward trending range," he said.
The week starts with sales details from French tyremaker Michelin and cosmetics firm L'Oreal, and results from German drugmaker Schering.
In the US, chipmaker Texas Instruments, Boeing, Microsoft, Dow Chemicals, International Paper and US Steel also report earnings next week.
Some strategists said high oil prices and jittery consumer confidence after Hurricane Katrina were likely to hit growth in the United States.
"We are heading towards a weakening of US economic growth, with far weaker growth rates by the end of 2006 and the beginning of 2007," said Andreas Hofert, a strategist at UBS Wealth Management.
Strategists at Merrill Lynch warned that global liquidity conditions could be at a turning point.
"We admit we were caught out by the strength of the US economy going into 2005 Q3. But we remain unrepentant in our belief that when America sneezes, the rest of the world will catch a cold," Merrill Lynch said in a note.
Global equity and bond markets have been hit by inflation worries, which signal higher interest rates, while at the same time companies are facing rising commodity costs.
Lilley of Royal London Asset Management, however, said firms such as those in the industrial sectors were able to manage higher input prices by slashing their costs.
"In some cases, they can't pass it on. They have to absorb it, but they have got their own internal cost-cutting measures going on, and rationalisation, which means that it doesn't damage their margins," Lilley said.
Nestle, the world's biggest food group, reported higher-than-expected sales this week and reaffirmed its year targets, as it raised prices to cope with higher costs.
Automakers DaimlerChrysler, Fiat and Renault, miner Antofagasta and insurer Prudential's feature on Wednesday.
Thursday is a busy day for UK results, with earnings due from Royal Dutch Shell, while BHP Billiton issues a trading statement, and tobacco firm BAT unveils results.
Numbers from GlaxoSmithkline and AstraZeneca will be closely eyed, with the US drug sector hit by a profit slump and a warning from Pfizer, the sector's biggest company.
Both European firms are set to unveil strong results, helped by aggressive cost cuts, which is helping to lift margins.
"We would use weakness in the EU industry as a reason to add to positions," Morgan Stanley pharmaceutical analysts said, reiterating their rating of the sector as "attractive".
On Friday, Deutsche Bank and Swedish bank SEB report results, along with Swiss engineering firm ABB.