The S&P 500 closed at 1,573 today, which is down over 6% from its recent all-time highs.

Many have attributed much of the pullback to the hawkish tone that the Federal Reserve has recently adopted.

However, stock market fundamentals have been deteriorating lately too. Specifically, earnings expectations have come down sharply. And earnings are arguably the most important driver of stocks.

In his latest note to clients, Citi's Tobias Levkovich says he is "shocked" by how negative these trends have been.

The Street had become a bit too happy of late and then got upended by the Fed and the likely tapering of QE amidst some prior hopes of a delay in ending such accommodative policy, almost without spending any time looking at earnings estimates or trends less than a month before second quarter results are released. Such a thought process seems ill-founded since earnings matter the most for equities, in our opinion, and there is relatively robust statistical evidence to back up that contention. In this respect, we have been a tad shocked by the surge in negative-to-positive preannouncement trends that make 2009’s surge appear less worrisome in retrospect (see Figure 1). Upward earnings guidance has dipped as well (see Figure 2) and there has been little consternation or discussion about it.

Citi Research

Levkovich may be exaggerating a bit by saying "there has been little consternation or discussion about it." Indeed, plenty of people have warned about asset prices dislocating from fundamentals. They just couldn't be heard over the deafening stock market rally.

Looking forward, Levkovich doesn't think this ugly trend of negative earnings expectations to improve in the near-term.

"[W]e suspect some additional estimate cuts may be in the making when company management teams provide more realistic 2H13 outlooks in the latter part of July during earnings related conference calls," he wrote.

"While we envision an improving US economic backdrop assisting estimates, we are more concerned about international activity trends, with Europe, China and Brazil potentially generating disappointment, alongside commodity-driven economies that may have been banking on better business activity as well."