Updated from 7:03 a.m. EDT.

Amid dire talk of the credit markets in recent weeks, investors' usual chatter about earnings growth has retreated to the background. And the sad thing is that when you peer a bit closer at what to expect when companies start reporting first-quarter earnings in two weeks, it becomes clear that this subject is not suitable for discussion in polite company.

Consider that on Jan. 1, analysts' consensus expectations for the first quarter earnings growth for S&P 500 companies was 5.7%. Two weeks ago, estimates had fallen to -1.1%. Now they're down to -4.4%, according to First Call data. Oops.

If this number turns out to be accurate -- and my guess, based on recent trends, is that it's overly optimistic -- it will mark the third straight quarter of earnings contraction. That hasn't happened for S&P 500 companies as a group since the recessionary span from the third quarter of 2001 through the first quarter of 2002.

In this context, you might think every single institution on the Street must be pessimistic. But that's far from the case. There are still prominent bulls out there who believe that not only is there no recession now, but there won't be one this year, either.

I think the bulls are wrong, and that the market is setting up for another major leg down. But it's important for bears to understand the bulls' case, and that it's backed by some of the top U.S. economic forecasters, including the intellectually potent ISI Group in New York.

Here's their angle:

Bulls believe that real consumer spending is on track to rise in the first quarter and that capital expenditures by corporations are also rising. They think that exports are the hidden lever, as they boosted fourth-quarter GDP last year by almost 1% and could do the same in the first quarter of this year. They believe that inventories were down by $10 billion in the fourth quarter, making room for enough buying to lift GDP in the first quarter.

Bulls also believe that unemployment claims remain below recessionary levels, that tax refunds are up 29% year over year and that the M2 measure of money supply has surged $151 billion in the past five weeks, lifting its annualized growth rate to a stunning 11%.

While even bulls admit that consumer net worth is being hit by house prices, that food and energy prices are acting as a tax, that lending standards are tightening and that employment is weakening, they still think that netted out against the positives, GDP has a shot at rising as much as 1.5% in the first quarter, which would shock a lot of people.

Moreover, they have the bond market on their side. Yields on two-year notes fell to 1.6% this week, as the stock market tumbled and municipal bond market melted down. That means bond yields don't offer much competition to stocks. I mean, does anyone really think that you can prepare for your future by having your money earn 1.6%, when inflation is probably higher than 2%? Bulls argue that low Treasury yields will essentially force institutional investors, and the public, into stocks.

The bulls have no doubt that the U.S. economy is slowing -- don't get me wrong. They can see that in lower consumer confidence readings, lower home sale prices, poor earnings reports from major companies like Home Depot ( HD), and sales reports from Google ( GOOG). But they believe there is still demand from the global economy, as even during a slowdown, India is still expected to grow by 8.4% this year and China is expected to grow by 9%.

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