NEW YORK (Reuters) - A heavy gloom hanging over Wall Street may deepen this week unless such bellwether companies as Apple and United Technologies provide investors with hope that the US economy can avert recession.

A slew of major corporations, also including Bank of America Corp, Microsoft Corp and AT&T Inc., will release quarterly earnings in a shortened trading week that has scant economic data scheduled for release.

Markets will be closed on Monday for Martin Luther King Jr Day.

"Earnings (this) week are the only thing that the market has to hang its hat on. With the market in such a fragile condition, those earnings better be good or we could see some severe selling," Richard Sparks, senior equities analyst with Schaeffer's Investment Research in Cincinnati, said on Friday.

Investors took little solace this past week from a $150 billion White House rescue plan as stocks fell on enormous losses at Citigroup, the top US bank, and Merrill Lynch, the world's largest brokerage, and economic data signalled the US economy was headed for recession. US stocks, as measured by the broad Standard & Poor's 500 Index, are off 9.7 percent so far in January — their worst start of a year ever. If markets again slide like they did this week, stocks will be in bear territory — a 20 percent drop from their peak in October.

One major stock index — the Russell 2000 Index of small-cap stocks — passed that milestone last week. A fall in the S&P 500 of about 5.5 percent this week would put it in bear territory. Its 5.4 percent fall last week was the biggest weekly percentage drop since July 2002.

On Friday, the S&P 500 fell 8.06 points, or 0.60 percent, to a 16-month low of 1,325.19. Both the Dow Jones industrial average — off 59.91 points, or 0.49 percent, at 12,099.30 — and the Nasdaq Composite Index — down 6.88 points, or 0.29 percent, at 2,340.02 — hit 10-month lows.

For the week, the Dow fell 4.02 percent and the Nasdaq 4.10 percent.

In light of the economic outlook companies are going to be cautious regarding their guidance, said Owen Fitzpatrick, head of US equities at Deutsche Bank Private Wealth Management.

In addition, the sharp sell-off seen in recent weeks might not be over, Fitzpatrick said.

"The market seems to be to some extent capitulating," he said. "I think we're finding a bottom, and that's not to say we might not find another one."

Among companies slated to report are financial heavyweights Bank of America and Wachovia Corp tomorrow; technology bellwethers Apple, tomorrow, eBay Inc and Motorola Inc on Wednesday, and AT&T, on Thursday. Among major industrials and big oil, UTX and ConocoPhillips report on Wednesday and Caterpillar Inc. on Friday.

Investors will sift data to assess the pulse of the nation's economic health from first-time claims for state unemployment insurance benefits and existing-home sales for December, both to be released on Thursday.

The forecast for jobless claims is 325,000, while the pace of existing home sales is expected to show an annual rate of 4.95 million, according to Reuters polls.

The sell-off has been so steep that stock valuations look reasonable and may suggest large caps do not have much further to fall, said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

To be sure, Ablin said, the Russell 2000 is one of the most overvalued major indexes in the world and could tumble perhaps another 40 percent, he said.

"From a valuation basis of large caps, we're reasonably close to fair value depending on what the assumption of earnings is," Ablin said.

Even if earnings growth is negative in 2008, "maybe that means we have to come down another five percent", Ablin said. "But I don't see the bottom falling out."

Companies that make up the S&P 500 are expected to post earnings growth of 15.3 percent in 2008, according to Reuters Estimates. At the beginning of the week, the S&P 500 was trading at 13.82 times forward earnings, Reuters Estimates said, below a historic average of about 15 percent.

But in a time of market turbulence sentiment will trump fundamental analysis of stocks.

"If people don't feel like buying, they're not going to buy and we'll overshoot and maybe the market ultimately gets cheap," Ablin said. "I would say right now we do still have negative skew."