Updated from 5:39 p.m. ET to include additional commentary on the FOMC meeting, after-hours action.

NEW YORK ( TheStreet) -- Don't look now but the thesis that earnings are going to improve as the year wears on is starting to show some cracks.

According to Thomson Reuters data, the current blended analyst view is for profits from the S&P 500 to grow 9.8% in the second quarter, 6.2% in the third quarter, and 16.2% in the fourth quarter on a year-over-year basis.

But while the first quarter is shaping up pretty well, Tobias Levkovich, chief U.S. equity strategist at Citigroup, sees some clouds forming on the horizon.

"The austerity programs and credit conditions in Europe should mean a tougher second half economically, while the so-called US 'fiscal cliff' at year-end and Presidential elections in early November may cause management teams to defer some activity in 3Q12 until better fiscal policy visibility emerges," he said. "Under these circumstances, a sharp recovery in EPS growth looks challenging, in our view."

Levkovich also says corporate margin expansion is stalling, a significant obstacle for bulls expecting stocks to resume the near-constant upward trajectory they exhibited in the calendar first quarter.

"A renewed rally now appears unlikely when EPS estimates are uncertain," he said. "Given a more mixed sentiment signal and valuation backdrop, EPS trends become more crucial for equity price movement and it seems optimistic to buy into current forecasts. To be fair, investors are not pricing in powerful long-term earnings expansion and this protects the downside risk to equity indices, but banking on a big rally now requires a more aggressive posture."

Bank of America Merrill Lynch is more optimistic. It sees the potential for more downside in the S&P 500 from here but views this as normal trading behavior given how far the broad market has come in such a short amount of time.

"It is very typical for the equity market to correct part of a strong rally," the firm said early Tuesday. "The rule of thumb is one third to one half of the rally can be corrected. Measuring this off the October 2011 low to the April 2012 high on the S&P 500 would correct the S&P down toward 1300-1250. These levels fall right on the key supports that we have been targeting if 1340 (the March low) is breached. We believe the market is in a confirmed correction that will lead to a summer rally."

B of A is looking for the mega caps to provide some leadership, a thesis that looked prescient after Tuesday's session, which saw the Dow post the biggest gain.

Among the names the firm likes are Caterpillar ( CAT), Chevron ( CVX), Intel ( INTC), Eli Lilly ( LLY), Procter & Gamble ( PG), Kimberly-Clark ( KMB), Coca-Cola ( KO), United Parcel Service ( UPS), DuPont ( DD), and Verizon ( VZ), a group of stocks that it says have strong technicals and are under-owned by institutional investors.

As for Wednesday's scheduled news, aforementioned Dow component Caterpillar reports ahead of Wednesday's opening bell, and the average estimate of analysts polled by Thomson Reuters is for earnings of $2.13 a share on revenue of $16.22 billion. In the same period a year earlier, the company earned $1.84 a share on revenue of $12.95 billion.

Shares of the Peoria, Ill.-based maker of construction and mining equipment have outperformed in 2012, rising nearly 18%, after being one of the weaker blue chips in 2011. The company is coming off a 34% upside profit surprise in the fourth quarter, so between that and the stock's appreciation, there is some pressure on management to deliver another resounding beat.

It's worth noting as well though that the shares hit their 52-week high of $116.95 on Feb. 25, so the past two months have underwhelming. On April 11, Caterpillar announced the decision to maintain its quarterly cash dividend at 45 cents a share, which gives the stock a respectable forward annual yield of 1.7% at current levels.

The sell side is very bullish ahead of the report with 18 of the 24 analysts covering Caterpillar at either strong buy (8) or buy (10), and the 12-month median price target at $131, implying potential upside of 21% from Tuesday's close at $108.40.

Morgan Stanley is one of the bulls, rating the stock at the equivalent of strong buy with a $125 price target. The firm thinks Caterpillar could lift its current outlook for earnings of $9.25 a share in 2012 if sales/revenue come in at the midpoint of its $68 billion to $72 billion range. Wall Street's current consensus view is for full-year earnings of $9.54 a share.

"Management's long-term orientation and a ~$30 billion backlog should allow for a positive tone and a potential guidance raise, although we'll want to focus on the fragile recovery in core end markets," Morgan Stanley said. "We view CAT as well positioned to capitalize on positive cyclicality and remain Overweight."

Check out TheStreet's quote page for Caterpillar for year-to-date share performance, analyst ratings, earnings estimates and much more.

Boeing ( BA) is the other Dow component reporting its results on Wednesday. The aircraft maker is expected to report a profit of 94 cents a share in the March-ended period on revenue of $18.37 billion.

The company's production outlook for the 787 is slowly getting brighter, but Wall Street will be looking for some color on how recent tornadoes in Kansas will impact volumes.

The stock is basically flat so far in 2012, though it's up 30% since scraping a 52-week low of $56.01 in August 2011. D.A. Davidson has a neutral rating on Boeing and a 12-18 month price target of $80. The firm is expecting earnings of 85 cents a share, well below consensus, with the overall operating margin dipping down to 5.9%, a year-over-year decline of 80 basis points.

"We expect Boeing Commercial Airplanes to begin to benefit from production increases on all of the current models, though we expect margins to be negatively impacted by mix due to an increase in lower margin, but higher priced aircraft deliveries (787 and 747-8)," D.A. Davidson said in a preview of the numbers on Friday. "We expect the Defense, Space, and Security to decline 3% year-over-year driven by U.S. budget pressures. We don't expect nor foresee a dramatic cut in spending yet, although political rhetoric is growing and defense cuts will happen, eventually."

Check out TheStreet's quote page for Boeing for year-to-date share performance, analyst ratings, earnings estimates and much more.

Other companies reporting early Wednesday include ARM Holdings ( ARMH), AutoNation ( AN), Avery Dennison ( AVY), BankUnited ( BKU), Corning ( GLW), Credit Suisse Group ( CS), Dice Holdings ( DHX), Diebold ( DBD), Dr. Pepper Snapple Group ( DPS), Eli Lilly, General Dynamics ( GD), GlaxoSmithKline ( GSK), Harley-Davidson ( HOG), Hess Corp. ( HES), Hudson City Bancorp ( HCBK), Jones Apparel Group ( JNY), MeadWestvaco ( MWV), Motorola Solutions ( MSI), Nasdaq OMX Group ( NDAQ), National Oilwell Varco ( NOI), Northrop Grumman ( NOC), Owens Corning ( OC), Rockwell Automation ( ROK), SAP AG ( SAP), Siemens AG ( SI), Six Flags ( SIX), Sprint Nextel ( SIX), Tupperware ( TUP), US Airways Group ( LCC), WellPoint ( WLP), Whirlpool ( WHR), Wyndham Worldwide ( WYN), and Zipcar ( ZIP).

The late roster features Akamai Technologies ( AKAM), Ancestry.com ( ACOM), BroadVision ( BVSN), Cheesecake Factory ( CAKE), Cirrus Logic ( CRUS), Citrix Systems ( CTXS), Goldcorp ( GG), Las Vegas Sands ( LVS), Morningstar ( MORN), Owens-Illinois ( OI), Skechers U.S.A. ( SKX), Tractor Supply ( TSCO), Williams Cos. ( WMB), and Xilinx ( XLNX).

The big event on Wednesday's economic calendar is the outcome of the Federal Reserve's two-day policy meeting. The Federal Open Market Committee is expected to hold to its promise to keep interest rates at historic lows until at least late 2014 and to leave the language around further quantitative easing largely undisturbed. One area where change is expected is in the central bank's projections for the unemployment rate. The decision on rates is due at 12:30 p.m. ET.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, is expecting the Fed to to lower its forecast for the unemployment rate by at least three tenths, a move that would bring the central bank's range for the fourth quarter down to 7.9-to-8.2%.

"We expect the actual result will be much lower than this -- we target 7.5% -- but Mr. Bernanke and the other doves have invested heavily in the idea that the recent rate of decline has unsustainably rapid and will slow sharply," Shepherdson said. "Even so, the Fed will have to acknowledge that the unemployment rate is already at the bottom of the January forecast range, 8.2-to-8.5%. To leave the current forecasts unchanged would surely invite justifiable ridicule."

Wednesday also brings the Mortgage Bankers Association's weekly application activity index at 7 a.m. ET; durable orders for March at 8:30 a.m. ET; and the weekly crude inventories data at 10:30 a.m. ET.

And finally, Apple ( AAPL) was the star of Tuesday's after-hours session. After dropping in 10 of the past 11 sessions, the stock was flying in extended trades after the company destroyed Wall Street's expectations for its fiscal second-quarter results.

The shares were last quoted at $603.81, up 7.7%, on volume of roughly 6,4 million, according to Nasdaq.com. Earlier, the stock ran as high as $604.22. Apple's earnings of $12.30 a share easily beat the consensus view of $10.04 a share as it sold more than 35 million iPhones.

The company's guidance for the third quarter could become an issue when the euphoria dies down on Wednesday though as Apple forecast earnings of $8.68 a share on revenue of $34 billion vs. the average analysts' estimate for a profit of $9.93 a share on revenue of $37.45 billion.

The big mover to the downside in late trades was Baidu ( BIDU), whose first-quarter results failed to wow Wall Street. The Chinese Internet search company also forecast revenue of $847.2 million to $867 million for the second quarter, an outlook that's below Wall Street's expectations of around $870 million. The stock, which was up 20% so far in 2012, fell more than 9% to $123.26 on volume of more than 1.8 million.

-- Written by Michael Baron in New York.

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