A lackluster start to the second-quarter earnings season with Thomson Reuters forecasting a 36% year-over-year drop in earnings among the S&P 500 has deepened the rift between those pundits who believe the economy is well on its way toward recovery and those who think the recovery will be a slower, more torturous process.

Bulls suggest that companies that have pared down their inventories will now need to ramp up production in order to meet demand, thus stimulating the economy and the markets. Naysayers, on the other hand, suggest that recent stock market declines the Dow Jones Industrial Average shed 177 points last week reflect disappointment among investors who have seen their upbeat hopes dashed by sobering fundamentals, such as the 9.5% unemployment rate, weak retail sales and the limited impact that cost cuts have had on boosting corporate earnings.

Just look at the weak reaction to bellwether Alcoa (AA) lower-than-expected loss of 26 cents a share last Wednesday.) As we move further into the earnings season, Ed Yardeni, founder of Yardeni Research, believes there will be some pleasant surprises mixed into the gray, but very little evidence of real growth.

"There will be plenty of positive earnings surprises during the Q2 earnings season this month, as there were during Q1," he wrote Wednesday. "It should be the same story: Cost-cutting should boost margins, offsetting some of the weakness in sales."

But at this point, it may be more important to focus on earnings projections for the third quarter and beyond than to dwell on the second-quarter results, said LPL Financial chief market strategist Jeffrey Kleintop. "Market participants expect corporate leaders to express that conditions have started to improve and hold or raise their outlook for earnings in the coming quarters if they don t, their stock prices are likely to suffer," he wrote Tuesday. "Specifically, we will be looking for expectations for the third quarter to rise modestly and for the range of high and low estimates to narrow, reflecting improving confidence as uncertainty surrounding the economic outlook fades."

For Bill Gross, managing director at Pimco, the issue isn't how to decipher incoming earnings or future earnings guidance, for that matter, but rather how to recalibrate our expectations as investors and consumers following the credit-fueled binge that spawned the current economic mess.

Gross envisions a "new normal" where growth is slower, profit margins are narrower and asset returns are smaller than in decades past. These revised expectations, along with tougher economic regulations, should substantially inhibit the type of "gorging" on goods and services that consumers and investors had become accustomed to in the past, he wrote in his July commentary.

Yet, in some cases, it's clear that the old way of thinking has yet to entirely work its way out of investors' mindsets. Referring to the market's 40% surge from its March low, Morgan Keegan economist Donald Ratajczak said in a July 6 note, that "the rally started early because of the reversal of fear," then became overoptimistic. We may be back from the abyss, he says, but merely averting disaster doesn't mean there's real improvement. He believes a saw-toothed advance will characterize a recovery this autumn.

David Rosenberg, chief economist and strategist at Gluskin Sheff, also took up the bearish case in a Friday note, saying that he sees echoes of the 2002 recession, though this time on a much larger scale.

"We have seen this movie before a recession dominated by asset deflation, widespread excess capacity and deflation pressures, and then a huge shock that drags the equity market to massively oversold lows," he wrote. "Fiscal and monetary stimulus then ramp up, hopes of a capital spending revival and inventory restocking spring eternal, and risk assets enjoy a significant multi-month rally as earnings and economic projections get revised higher by the consensus community." In his opinion, such a scenario will set the stage for alternating greed and fear among investors, until real fundamentals catch up to and support expectations.

While the worst of the global recession should be over by the third quarter, any recovery will be difficult and slow, wrote Societe Generale global economist Brian Hilliard in the firm's July monthly outlook, published Tuesday.

"Efforts to summarize a view [of the recovery] in simple 'V-', 'U-', 'L-' or 'W-' shapes over-simplify the very complex reality that led to the downturn in the first place," he wrote. " The recovery will be no less complicated, with many medium-term excesses retarding the recovery dynamic."