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Investors appear to be increasingly optimistic. Stocks are rallying and the U.S. dollar has rebounded, fueled by growing expectation that the worst of the credit crisis is over and that the economy may even narrowly avoid a recession this year.

But the latest evidence indicates that we’re far from out of the woods yet.

The Federal Reserve’s latest Senior Loan Officer Opinion Survey released Monday showed banks dramatically tightened lending standards across all categories between January and April, citing “a less favorable or more uncertain economic outlook.” The percentages of banks reporting tighter lending standards “were close to, or above, historical highs for nearly all loan categories,” according to the survey, which covers both business and consumer lending.

Deteriorating loan performance is causing banks to increase premiums for riskier loans, loan covenants and collateral requirements. Aaron Smith, an economist at Moody’s Economy.com, argued that lending standards are now tighter on most forms of credit than at any time in the past 50 years. The most dramatic change in lending standards was for business loans, he said, as a net 55.4% of banks reported tighter conditions for commercial and industrial loans to large and midsized firms, up from 32.2% in the prior survey.

The reduced access to credit by both firms and consumers may prove to be the biggest downside risk to the economy. The most recent data on tightening credit conditions for commercial & industrial loans showed “meaningful worsening of credit conditions” and argue “forcefully that a classic recession is in place based on past experience, contradicting sanguine views that a recession will be averted,” said Citigroup Tobias Levkovich.

Credit leads the real economy and there’s usually a three-quarter lag between credit standards and corporate investment in human, working, and physical capital, Levkovich said. As a result, given the tougher credit environment, the lag, and the tight relationship between production and earnings, “it would seem very realistic to assume that more cyclical earnings estimates face substantive downward guidance with equity market implications.”

With Cisco set to report fiscal third-quarter earnings after the market close Tuesday, Wall Street will be paying special attention to what the Internet protocol-based networking provider has to say. Just ask Deutsche Bank analyst Cobb Sadler, who said Monday that for the last two quarters, Cisco’s “off-quarter” results and guidance have served as a leading indicator into calendar quarter results for the overall market.

Perhaps that is why there is no shortage of third-quarter previews and estimates among Wall Street’s major brokers, who are all trying to provide their clients with an edge heading into the remainder of the year. As for the general feeling, many analysts are expecting in-line results and conservative guidance from the San Jose, Calif.-based company. Those polled by Thomson Reuters have, on average, forecast third-quarter earnings at Cisco of 36 cents a share on revenue of $9.75 billion.

Banc of America analyst Tim Long, who rates the stock at neutral with a 12-month price target of $23, said in a note to clients that he, too, expects in-line results, with positive commentary on the service provider market, cable and the “much maligned” financial sector. Long also said he sees less macro risk in the carrier market, but that Cisco’s report won’t come without negatives. “We expect the commentary on the U.S. enterprise market to be the most cautious,” Long said in a note to clients. “Our checks have indicated potential softness in the emerging market theater. We also see risk to Japan, U.S. commercial and U.S. federal [business], where competitors saw weakness.”

But there is at least one analyst who is not overly concerned with earnings estimates. “Getting the quarterly estimates right is a mug’s game,” BMO Capital Markets analyst Paras Bhargava wrote. He said that his outperform rating and $30 price target is based on a long-term view that the networking market will grow faster than global GDP and that Cisco will keep taking market share. “We also believe that Cisco could complete some mid-size acquisitions in the near term,” the BMO analyst said.

Wachovia Capital Markets said Cisco’s recent run up of roughly 12% since April 15 has been factoring in an in-line or even modestly better third-quarter report. The broker maintained its outperform rating, saying it subcribes to the notion that Cisco will come out of the current economic slowdown as a stronger company, with continued double-digit growth opportunities driven by positive secular themes, including video, network-as-a-platform, and service provider network loads.

Wall Street is looking at a flat-to-lower open Tuesday as high crude-oil prices continue to weigh on sentiment, but Target Corp. may outperform after the discount retailer reduced its credit exposure by selling a significant stake in its its credit-card receivables operations to JPMorgan Chase & Co.

According to spread bettors IG Index, the Dow Jones industrial average is expected to open about 10 points at 12,981. S&P 500 futures were up 0.10 at 1,408.40, while Nasdaq 100 futures fell 2 to 1,978.50.
Wall Street pulled back Monday following Microsoft Corp.’s decision to withdraw its bid for Yahoo Inc. and as oil prices surged again.

The Dow Jones industrial average fell 88.66, or 0.68%, to close at 12,969.54, the Nasdaq composite index dropped 12.87, or 0.52%, to 2,464.12, and the Standard & Poor’s 500 index lost 6.41, or 0.45%, to 1,407.49. The yield on the benchmark 10-year Treasury note slipped to 3.84% from 3.86% late Friday, and crude oil futures for June delivery surged to a new trading high of $120.21 a barrel on the New York Mercantile Exchange before pulling back to settle up $3.65 at $119.97.

EARNINGS HIGHLIGHTS:

Company                 Symbol    Period     Estimate 

Amer Cap Strategies      ACAS       1Q       $   .76
Cisco Systems            CSCO       3Q           .36
Fannie Mae               FNM        1Q          (.81)
Molson Coors             TAP        1Q           .28
NYSE Euronext            NYX        1Q           .83
Qwest Communications     Q          1Q           .10
Sara Lee                 SLE        3Q           .24
Tenet Healthcare         THC        1Q           .01
Tesoro Corp.             TSO        1Q          (.49)
Walt Disney              DIS        2Q           .51
Figures in parentheses denote losses.

AFTER-HOURS ACTION:

After Monday’s close of trading, Merck & Co. said it is eliminating 1,200 U.S. sales jobs, a week after the Food and Drug Administration rejected an experimental cholesterol drug touted by the pharmaceutical company. Anadarko Petroleum Corp. said its first-quarter profit fell 83% from a year earlier, when results included nearly $1.7 billion in asset sales gains. McKesson Corp. said fiscal fourth-quarter profit rose 19%, and Principal Financial Group Inc. said first-quarter earnings and revenue fell.