In a lull before Wall Street gets flooded with first-quarter earnings, investors will be praying next week that stocks have caught up with reality this time.

The market was blindsided by earnings in the fourth quarter. At the start of the period, analysts were expecting year-over-year earnings growth for the

S&P 500

of 11.5%, according to Thomson Financial, and they wound up with a decline of more than 25%. By the time all the results were on the books, the S&P had lost 13% of its value.

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Now, analysts are predicting a 12.2% drop in earnings for the first quarter of 2008. On New Year's Day, they were forecasting a gain of 5.7%, but with fears of recession mounting along with continued turmoil in the financial markets, some are wondering if Wall Street still has not come to grips with its predicament.

"The numbers have come lower, but I'm still expecting more revisions," says Subodh Kumar, chief investment strategist with Subodh Kumar & Associates. "The markets are seeing analysts chasing earnings down, which means market volatility is likely to continue."

Kumar says second-quarter expectations should be lower as well. Analysts are now expecting a 2.9% drop for that period.

"I'm looking for roughly a 15% decline in earnings for the first half of the year," he says.

The stock market is now operating on hopes that the near bankruptcy of

Bear Stearns

( BSC) in mid-March drained the panic off Wall Street. The

Federal Reserve's

willingness to backstop a major investment bank and expand the reach of mortgage giants

Fannie Mae

( FNM) and

Freddie Mac

( FRE) has reassured investors that the central bank is willing to do whatever it takes to keep the financial system from being torn asunder.

"We were on the brink," says T.J. Marta, fixed income strategist with RBC Capital Markets. "The Fed pulled us back."

Last week, stocks gained with the

Dow Jones Industrial Average

adding 3.2%, the S&P 500 up 4.2% and the

Nasdaq Composite

up 4.9%. Meanwhile, since

JPMorgan Chase

(JPM) - Get Report

agreed to acquire Bear Stearns on March 16, the Philadelphia Banking Index has gained 9.4% and the S&P Retail Index has added 11%.

Optimists looking for a bottom in stocks note that financials and consumer discretionary stocks led the markets lower and will likely lead a turnaround when it comes. Pessimists point to persistently wide spreads in the credit markets along with a bevy of dismal economic indicators as a sign that the pain is likely to get worse before it gets better.

Last week, the government reported the third straight month of decline for the U.S. job market, with

nonfarm payrolls losing 80,000 jobs

in March. The expectations index in the Conference Board's consumer confidence survey has hit a 30-year low, and retail and auto sales continue to dwindle.

Meanwhile, the American Bankers Association recently reported that consumer-credit delinquencies in the fourth quarter were at their highest levels in nearly 16 years, as borrowers continue to fall behind on auto loans. It's forecasting that delinquencies will continue to rise in the first half of 2008, warning that "no relief for consumers is in sight."

"It will be interesting to see if financial stocks can hold up next week before their big earnings report," says Kumar, noting that

Wells Fargo

(WFC) - Get Report

,

Merrill Lynch

( MER),

Citigroup

(C) - Get Report

and

Wachovia

(WAC)

report results the following week.

Next week,

Alcoa

(AA) - Get Report

will kick off the first-quarter reporting season on Monday, and analysts expect the Dow component to report earnings of 48 cents a share.

The Fed will release the minutes from its March meeting on Tuesday, leaving investors to scour the report for signs of what the central bank will do with interest rates in April. After Friday's jobs disappointment, the fed funds futures market was recently pricing in a 38% chance of a half-point cut and a 62% chance of a quarter-point cut.

On Wednesday,

Circuit City

(CC) - Get Report

and

Bed Bath & Beyond

(BBBY) - Get Report

will report earnings and provide investors with a glimpse of the all-important consumer front.

Thursday will bring America's monthly reminder of the perils facings its long-term economic health. The government will report the nation's trade gap in February and its fiscal deficit in March.

General Electric

(GE) - Get Report

will report earnings on Friday, with analysts expecting the industrial conglomerate to log a first-quarter profit of 51 cents a share.

The government will also report March results for its import and export price indices that day, and the University of Michigan is expected to report that its preliminary reading on its consumer sentiment index ticked lower in April to 69.4 from 69.5.

"The Fed hasn't really fixed anything," says Marta. "They've just prevented disaster at this point."