Although there are still some notable holdouts, the idea that the U.S. has entered, or will enter, a recession, is pretty much a nonstarter these days. Economists polled by the Philadelphia Fed expect the economy to trough in the current quarter, growing at 1.2% on an annual basis. In the third quarter, the economy is expected to grow 2%, and in the fourth it's forecast to gain 2.6%.

Now, Wall Streeters often have an unfavorable view of economists' forecasting ability (which one might view as an example of gross hypocrisy), but recovery is an idea they've latched onto. Since the beginning of April, the

S&P 500

has gained 13% to 1312, the

Dow Jones Industrial Average

has tacked on 15%, putting it at 11,337 and within spitting distance of its all-time high, and the tech-stuffed

Nasdaq Composite

has rocketed 25% to 2305. Consumer-cyclical and capital-goods companies, which are supposed to see earnings respond quickly to turns in the economy, have done particularly well.

But investors may be a little too sanguine, interpreting an economy that sidestepped a recession as presaging a big profits recovery.

"Even if the economy is responding now to the series of Fed easings, pressure will remain on profits for a couple more quarters," says Tom McManus, a

Banc of America Securities

equity portfolio strategist.

Despite the recent rise in the unemployment rate, the labor market has remained fairly tight through the downturn -- a sign, McManus thinks, that companies are having a harder time extracting wage and benefit givebacks from labor than in the early and mid '90s. This has obviously helped the economy, helping keep consumers confident that they'll have future paychecks to spend. Companies, however, may have a harder time reaccelerating profits because their wage costs are higher than they need to be.

Then there's energy.

Unlike what one would normally expect in an economic downturn, energy prices have remained stubbornly high, thanks to strained capacity at refiners and power generators. If the economy picks up, and the demand for energy with it, energy costs won't be coming down substantially any time soon. Besides hurting companies at the margins -- more money that might otherwise drop to the bottom line goes toward energy -- it also cuts into revenues because their customers are bearing higher energy costs as well. As

Merrill Lynch

chief quantitative strategist Rich Bernstein puts it, a lot of companies "will probably get squeezed by that liquidity flowing into the gas tank."

Despite the worries about labor and energy costs, says

Salomon Smith Barney

economist Steve Wieting, earnings growth should probably make its way into the positive column by the end of the year. Wage pressures, which economists have been voicing concern about since 1995, have yet to mete out any serious damage, Wieting says. Electricity and gasoline prices are high, but it is

rising

prices that seriously affect the economy, and Wieting reckons that most of the gains in energy costs are behind us.

Still, wage and energy costs will drag on profits. "You shouldn't be looking for booming earnings," Wieting says. "You should look for a modest rebound." He expects S&P 500 earnings, year over year, to be down 11.5% in the second quarter, down 7.5% in the third and up 4.9% in the fourth.

Yet investors may expect something more dramatic than that. Wall Street analysts certainly do. According to

Thomson Financial/First Call

, consensus expectations are for earnings to drop by 9% in the second quarter, fall by just 2% in the third and then climb by 10% in the fourth. In the months to come, says McManus, the market may pay the price for such optimism.

"The bar is still too high for the third and fourth quarters. Without some kind of lowering of expectations between now and September, I think there will be another reckoning period."