By Kate Gibson

As stock investors on Monday braced for first-quarter earnings, analysts said the market reaction to the reports could well depend on whether expectations have been set low enough.

"We will see in about 10 days whether the 'less worse' economic viewpoint held by many investors and analysts extends to the first quarter earnings and the outlook offered by American CEOs of companies hit hard by the current recession," said Frederick Dickson, chief market strategist at D.A. Davidson and Co.

"We have been looking for things to get 'less bad' -- however our reading of the recent data does not yet support that view, although stock investors have taken it to heart that the bottom is now in and the only decision left is not to buy, but how much. The markets will get another test this week, as expectedly poor earnings will be reported. Maybe they'll be 'less bad' too," said Paul Nolte, director of investments, Hinsdale Associates.

Dow component and aluminum giant Alcoa Inc. (AA) reports its first-quarter results on Tuesday, the unofficial start of the earnings season.

Ahead of Alcoa's results, commercial glass provider Apogee Enterprises Inc. (APOG) and blood bank automator Immucor Inc. (BLUDE) are both scheduled to release earnings after Monday's close.

"Earnings expectations for most companies have been dramatically lowered over the last 90 days, a fact recognized in the drop in stock prices over the same period. The question is whether analysts have lowered expectations enough and whether companies meet or top the lowered performance bar," Dickson said.

In the near term, Dickson expects market pullbacks as likely to be shallow, "unless we hit a new barrier in the form of much-worse-than-expected first quarter earnings, current quarter earnings, or revenue guidance for bellwether companies."

"It's all about earnings," said Ed Yardeni, chief investment strategist, Yardeni Research Inc., who cited the consensus of industry analysts at pegging S&P 500 companies as earning $12.26 a share on an operating basis during the first quarter, versus $16.62 a share for the year-ago period, and $22.39 a share for the same time two years ago.

"Since the third quarter of 2007, the analysts' consensus estimate at the beginning of each earnings season was too high compared to the actual aggregate number reported by the companies. So, it is likely that the analysts may be too high again," said Yardeni.

That said, analysts might have low-balled earnings for the financial sector, given the recently amended mark-to-market rule, the strategist said.

The potential impact of the change in accounting standards has investors anxiously awaiting bank earnings amid expectations the rule change "will substantially improve the balance sheets of the major and secondary bands," said Marc Pado, U.S. market strategist, Cantor Fitzgerald. But, 'it will really be next week that we get the banks and important tech earnings started," Pado added.

Yardeni also believes companies in the energy sector might beat expectations, given the rise of crude oil from as low as $35.35 a barrel in late December to $49.66 a barrel by the end of March.

"Another sector with possible positive surprises could be information technology, given its relative strength in recent weeks," said Yardeni, who cites as one major concern on the earnings front the prospect for profits from overseas "given the sharp drop in the global economy and world exports."

The past four weeks included multiple surprisingly positive earnings reports from companies representing a cross section of the economy, said Robert Pavlik, chief market strategist, Banyan partners LLC.

Pavlik pointed to electronics retailer Best Buy Co. (BBY), business software titan Oracle Corp. (ORCL) and Darden Restaurants Inc. (DRI) as three examples of companies recently topping expectations.

"A possible conclusion is that the analyst's estimates are now low enough to allow for a potentially better than expected first quarter earnings season," Pavlik said.

On Monday, stocks declined for the first day in five sessions amid renewed worries about large banks, and after reports that International Business Machines Corp.'s (IBM) proposed deal for Sun Microsystems Inc. (JAVA) had fallen through.

With the price of crude oil sliding for a second straight session, energy companies led sector declines as the Dow Jones Industrial Average (DJI) fell 147.11 points, or 1.8%, to 7,870.48. The S&P 500 (SPX) declined 18.13 points, or 2.2%, to 824.37, while the technology-laden Nasdaq Composite shed 36.92 points, or 2.3%, to 1,584.95.