Cast your mind back to the beginning of the second quarter and recall how dreary things were. Companies were warning left and right, there was no hope the economy would revive quickly and stocks were about to drop to levels not seen since the fall of 1998.

Yet Wall Street analysts had a pretty rosy view on corporate America's outlook, forecasting that

S&P 500

second-quarter earnings would contract by just 6% from a year ago, according to

Thomson Financial/First Call

. But 721 warnings later, the analysts have changed their tune. With earnings season set to heat up next week, analysts now reckon S&P earnings will fall 17%, making the first quarter's 6.3% contraction seem mild by comparison.

Analysts' apparent inability to get anywhere in the neighborhood, or even ZIP code, of an accurate forecast has done nothing for investors' nerves.

"If the guys whose livelihoods depend on watching these companies get surprised," says

W.R. Hambrecht

head of listed trading Todd Clark, "it doesn't make you want to go in and be a buyer." The latest blast was a pair of warnings from chipmaker

Advanced Micro Devices

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and storage leader



, both of which said results would be well below analyst estimates.

Clark's doubts aside, the market has dealt better with the warnings this quarter than it did in the last. Over the past month, as the brunt of earnings warnings came in, the benchmark S&P dropped by about 6%. In the comparable period last quarter, it fell by around 10%. First Call equity strategist Joe Kalinowski also notes that the number of warnings has fallen this quarter from first-quarter levels, and that more companies are saying that they will meet or beat analyst expectations.

Moreover, notwithstanding a handful of late warners, by the time earnings start coming in, the bad news has typically already been aired. The majority of companies that haven't warned end up meeting, and often beating, analyst estimates. Earnings season is usually a happy time on Wall Street.

The problem this time may be that companies are going to have to deal with third-quarter estimates, which seem far too high. That means they may be spending a good deal of time laying crepe on expectations when they report their numbers. The consensus is calling for S&P 500 earnings to fall by just 6.7% from a year ago. In contrast,

Salomon Smith Barney's

economics group forecasts that earnings will drop by 12%.

"We should be considered optimists," says Salomon senior economist Steven Wieting. "We expect the economy to rebound." In fact, with a call for

gross domestic product to climb by 2.5% in the third quarter, the Solly economists' outlook is among the rosiest on the Street. Implicit in the analysts' earnings expectations is a forecast that the economy will grow at a significantly quicker clip, a sharp V-shaped recovery that is nearly impossible to imagine.