Updated from 5:47 p.m. ET with additional information on after-hours trading.

NEW YORK ( TheStreet) -- Now that was a pullback.

The dip buyers were nowhere to be found on Tuesday as all three major U.S. equity indices dropped more than 1.5%. A confluence of factors fueled the selling, which marked a fifth straight losing session for stocks, but the problem in the main was Spain.

Rising bond yields for the world's twelfth largest economy led to a sharp sell-off across the pond with the FTSE closing off 2.2% and the DAX down 2.5%.

That spooked Wall Street, sending investors racing for the exits ahead of first-quarter earnings season, which actually got off to a decent start following a surprise profit from Alcoa ( AA) after the closing bell.

The worries about Spain completed a trifecta of negatives for equities that have cropped up in the past week. First, the minutes of the latest Federal Reserve policy meeting released last Tuesday seemed to squash hopes for another round of quantitative easing from the central bank.

That was followed up by the weak jobs report for March on Friday, and then Spain stepping in for Greece as the poster country for eurozone worries. Add it all together, and the urge to take some profits is understandable after the S&P 500's merry 30%-plus gallop to an intraday high of 1422 on April 2 from its near-term low of 1075 on Oct. 4.

The big question now is what to do from here? Bank of America Merrill Lynch weighed in on the recent selling before Tuesday's opening bell, saying it believes the S&P 500 is going through a rest period, not a major top, and putting near-term support for the index in the 1340-1375 range.

The firm thinks mega-caps look primed to provide some leadership, citing what it termed "important recent breakouts" for Coca-Cola ( KO), Pfizer ( PFE), Qualcomm ( QCOM), and United Parcel Service ( UPS), and it likes both Cisco ( CSCO) and Exxon Mobil ( XOM) to go the same route.

B of A also detailed its safety check list for stocks, listing four criteria that it's watching for signs that 2012 will follow 2011's pattern and the old market adage of sell in May and go away will be play again this year.

The firm is monitoring the New York Stock Exchange stocks only advance-decline line, which it says still needs to break out; the action in the Dow transports, which haven't confirmed the near-term highs for the overall Dow index; the KBW Bank Index, which has significantly outperformed in 2012, a trend that B of A thinks needs to continue; and the level of bearishness as measured by the Investors Intelligence survey with a reading below 20% seen as a sell signal.

Meantime, earnings season is upon us and could tell the tale. Expectations are low with analysts are expecting the companies in the S&P 500 to post year-over-year growth of around 3%, down from growth of 9.2% in the fourth quarter, according to Thomson Reuters. Take Apple ( AAPL) out of the equation, and that drops down to 1.8%.

With such a modest bar to clear, the stage may seem like it's set for corporations to outperform and send stocks even higher. But the possibility of that scenario playing out has to be balanced against the significant appreciation that equities have already enjoyed. Many of the best-performing stocks this year were the biggest duds of 2011, and the bargain hunting can only carry the market so far. If 2012's rally isn't going to stall, stocks may have to actually earn it from here.

The banks will start setting the tone later this week with JPMorgan Chase ( JPM) opening its books before Friday's opening bell. Bank of America ( BAC), up more than 50% and the biggest percentage gainer in the Dow in 2012, will follow on April 19. BMO Capital previewed its expectations for the sector on Tuesday and it sees some cause for concern, especially given how far the financials have already run up in 2012.

" W e believe that there are some downside risks to earnings as industry-wide loan growth appears to be falling well short of consensus projections for 1Q12, margins may be under additional pressure and deposit service charges may disappoint," the firm said, adding later: "We would expect to see somewhat of a pullback in the group during 1Q earnings season based on the aforementioned risks and given that we believe valuations have gotten a little ahead of bank fundamentals in the near term."

The battle between valuations and fundamentals will be a theme over the next few weeks as earnings season plays out and tension builds going into the summer when the markets stumbled last year with QE2 coming to an end. The Fed's Operation Twist will keep the music playing into June again, but investors sitting on double-digit percentage profits may not want to be on the dance floor when the song ends.

As for Wednesday's scheduled news, the earnings calendar is light, featuring names like ADTRAN ( ADTN), and Hooker Furniture ( HOFT), and Progressive Corp. ( PGR).

On the data front, Wednesday brings the Mortgage Bankers Association's weekly application activity index at 7 a.m. ET, export and import prices for March at 8:30 a.m. ET, and weekly crude inventories at 10:30 a.m. ET. There's also the Treasury Department budget data for March, and the release of the Fed's Beige Book release on recent economic conditions to key on. Both are on the docket at 2 p.m. ET.

And finally, Alcoa was the star of Tuesday's after-hours session. As previously mentioned, the aluminum company was able to glide past Wall Street's expectations with its first-quarter profit of $94 million, or 10 cents a share, on revenue of $6.01 billion. The performance handily beat the average analysts' view for a loss of 4 cents a share on revenue of $5.77 billion, and the stock gained 5.4% in extended trades to $9.82 on volume of 5.5 million.

Also active after the bell was Applied Micro Circuits ( AMCC), which dropped 5% to $5.95 on volume of less than 50,000, according to Nasdaq.com. The semiconductor company fell after forecasting a non-GAAP loss of 10 to 12 cents a share for its fiscal fourth quarter ended in March, wider than the average estimate of analysts polled by Thomson Reuters for a loss of 8 cents a share.

Applied Micro, whose shares are down more than 35% in the past year, expects revenue for the March period to come in at 6% below $52 million, which is the midpoint of its prior guidance. That translates to revenue of $48.9 million vs. the consensus view of $52 million. The company cited "slowness in the service provider space and the overall wire line market weakness" for the shortfall.

Owens-Illinois ( OI) will also be a stock to watch on Wednesday morning. Shares of the Perrysburg, Ohio-based glass container company jumped 9% to $24 on late volume of more than 30,000 after it issued a strong outlook for the first quarter, saying it expects earnings from continuing operations to be at least 35% above a profit of 50 cents a share in the year-ago equivalent period.

The company credited the strong view, which implies earnings of at least 67 cents a share in the March period, to efficiency that resulted in greater than planned production rates. The current average analyst estimate is for earnings of 50 cents a share.

-- Written by Michael Baron in New York.

>To contact the writer of this article, click here: Michael Baron.
Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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