Wall St Week Ahead-Recession looms but Yahoo bid stirs optimism

By Herbert Lash

NEW YORK, Feb 1 (Reuters) - Fears of a looming recession could batter U.S. stocks next week as investors weigh a dim earnings outlook for 2008 against a view that holds shares are cheap as seen by Microsoft's $44.6 billion bid for Yahoo.

U.S. employers cut payrolls in January for the first time in 4-1/2 years, the government said on Friday, another sign the U.S. economy is teetering on the brink of recession.

"The main sword of Damocles hanging over the market is the probability that we are either in or slip into recession," said Al Goldman, chief market strategist at A.G. Edwards in St. Louis.

"My sense is that the market is going to go lower, that we're going to retest the lows of last week ... and eventually I think we're going to break them," he said.

The broad Standard & Poor's 500 Index .SPX slumped to 17-month lows on Jan. 23 and then bounced back some, but investors have not fully taken into account the fact that profit growth could decline 5 percent this year, Goldman said.

Stocks rose in volatile trade on Friday on optimism over stock valuations after Microsoft Corp's (MSFT.O: Quote, Profile, Research) takeover offer for Internet company Yahoo Inc (YHOO.O: Quote, Profile, Research).

The bid is a 62 percent premium over Yahoo's share price on Nasdaq before the deal was announced.

The Dow Jones industrial average .DJI rose 0.73 percent, to 12,743.19 on Friday. The Standard & Poor's 500 Index .SPX gained 1.22 percent at 1,395.42 and the Nasdaq Composite Index .IXIC added 0.98 percent to 2,413.36.