Market Preview: Not So Great Expectations

Citigroup is of a similar mind, saying the second quarter isn't likely to repeat the first quarter's strength. The firm believes analyst expectations have come down enough in general to generate "modest there's that word again positive 'surprises'" but it thinks the fourth quarter may be problematic as the current sell-side view doesn't appear to reflect the worsening macro situation in Europe.

Bank of America Merrill Lynch said Monday the early indications are that the second quarter is going to be a tough one and it echoed Citigroup's worries about the fourth quarter.

"Twenty-five S&P 500 companies have already reported 2Q results, with 56% beating on EPS, 40% on sales, and 28% on both," the firm noted before the market open. "At this time last quarter, results were better: 68% of companies had beaten on EPS, 82% had beaten on sales, and 57% had beaten on both. Positive surprises may be less abundant compared to last quarter when analysts had grown too pessimistic, in our view, ahead of earnings season. Companies which disappointed last quarter were punished more than companies that beat were rewarded, and we could see a similar scenario this quarter amid building macro uncertainty as investors look for confirmation that the US corporate sector remains healthy."

B of A pointed out that analysts are currently looking 14% year-over-year earnings growth in the fourth quarter but its own economists sees gross domestic product growth of just 1%, an equation that doesn't add up.

"Estimate revisions have begun to roll over, with analysts now making more cuts than increases to EPS on a three-month basis, but we think this trend may have further to go," the firm said. "We have taken a more cautious stance on our earnings estimates for companies with high foreign or US government exposure, given the recession in Europe and high level of uncertainty ahead of the US fiscal cliff that will likely lead to slowing growth in the second half of this year."

The commentary is timely given the deep cut to top-line expectations by Advanced Micro Devices(AMD) . The no. 2 chip maker now sees a sequential decrease in revenue of 11% for the second quarter, down from a prior forecast for growth of 3%.

AMD, whose shares fell more than 5% in late trades, cited slow growth in China and Europe as well as weak consumer demand for PCS for the weak outlook.