The key metrics used for the baseline scenario were an assumption that the GDP would contract by two percent this year and grow 2.1 percent in 2010. It also projected for an unemployment rate of 8.4 percent this year and 8.8 percent next year and house prices declining 14 percent and four percent.

The severe but plausible scenario: (assuming the 3.3 percent GDP decline in 2009 and 0.5 percent GDP gain in 2010 proves true) Unemployment will hover at 8.9 percent in 2009 and increase to 10.3 percent in 2010 with house prices down 22 percent in 2009 and seven percent in 2010.

But even as the tests were being completed, economic data showed that the nation was moving beyond the stress test baseline. The national unemployment rate is already 8.4 percent just four months into the year, with house prices off by 6.5 percent of the baseline. Thus, it seems entirely possible that we may reach the worst case scenario.

Already there are reports that at least one of the 19 banks undergoing testing will require additional capital. All banks found deficient will have the option of raising capital in the private market or through government loans.

There are worries however that the testing doesn’t go far enough and that unexpected deterioration in loan portfolios may render the tests a largely academic exercise.

Despite that, first quarter reports from the several banks in the financial sector were better than expected across the spectrum of both large and small banks.

Bank of America (NYSE: BAC) reported earnings per share of 44 cents in the quarter versus the Wall Street consensus estimates of four cents. Much of the gain was related to the bank’s acquisition of Merrill Lynch as its loan portfolio continued to deteriorate with net charge-offs rising from 1.25 percent to 2.85 percent. Credit card losses also took a huge jump. Up to 8.62 percent from 5.19 percent previously.

Overall the gains in EPS don’t appear to be the result of quality earnings and likely aren’t sustainable in the long term. And despite the gain from Merrill Lynch in the first quarter, the acquisitions contributions to earnings likely won’t continue to be positive.

Most small banks also continue to outperform expectations with earnings ranging anywhere from a few cents to more than a dollar over analyst estimates. The overall quality of earnings also appears much more sustainable. Though, there were a few banks reporting. Macatawa Bank (NSDQ: MCBC), whose primary service areas are in economically impacted areas such as Michigan, took large losses in the quarter.

Capital One Financial (NYSE: COF) chalked up a loss in the first quarter, reporting a net loss of 45 cents per share. Charge-offs continued rising for Capital One. Up 9.33 percent in March alone, putting an extreme pressure on earnings. The company expects full-year charge-offs to rise substantially from its initial estimate of $8.6 billion.

So while it seems unlikely that the banking sector will completely melt down from an earnings perspective, investors have been unnerved by the fact that the government evaluations of our largest banks might not go far enough.

Earnings in other sectors have held up well, with the technology sector performing extremely well with IBM (NYSE: IBM) beating expectations by two cents and despite falling chip demand, Texas Instruments (NYSE: TXN) also managed to outperform estimates by six cents.

Earnings in the health care sector have also remained solid, with Gilead Sciences (NSDQ: GILD) and Cubist Pharmaceuticals (NSDQ: CBST) both posting solid EPS gains.

Other sectors of the market were a mixed bag with real estate investment trusts failing to hit even conservative estimates and earnings in consumer staples softening as demand dampens.

The Numbers

Last week was data light and real estate heavy.

Existing home sales dipped three percent in March, reaffirming my take on the February numbers that that month’s increase was likely a one off event. Sales fell to an annualized rate of 4.57 million units, from February’s 4.71 million unit pace. Interestingly, existing home sales in the western region of the US rose 18.9 percent as average selling prices plunged 11.1 percent and first time home buyers moved in order to take advantage of tax credits.

New home sales also fell off their February surges, falling 0.6 percent in March from an 8.2 percent gain in the prior month. Sales actually would have been up in March were it not for a sharp upward revision in February, which added an additional 21,000 units to the figure. Overall annualized sales fell to 337,000 units from 358,000 previously.

According to data released last week by the Federal Housing Finance Agency, home prices rose 0.7 percent in February, building on the one percent gain in January, though over the past twelve months home prices were down 6.5 percent. That leaves the index 9.5 percent below its April 2007 high. In totality though, it appears the real estate price declines may be moderating.

Initial unemployment claims bounced off their sharp declines last week, falling in line with analyst expectations for 640,000 new claims to be filed. Initial filings rose by 26,000 and continuing claims also took another leg up reaching 6.137 million, a new record.

Durable goods orders declined in March, down 0.8 percent overall (0.6 percent with transportation related items factored out). That drop comes on the heels of a revised February increase of 2.1 percent, well off the initially reported 3.4 percent rise. Inventory data continued to improve though, down 1.1 percent to $331.6 billion. The pace of inventory contraction helps to put a floor under orders; as inventories fall, orders stabilize as businesses are forced to replenish.

Finally, the Conference Board’s index of Leading Economic Indicators continued its decline in March, falling 0.3 percent. That’s the index’s ninth straight monthly decline, though economists with the Conference Board are saying that the intensity of the recession will ease by summer as consumer expectations and other indicators are improving.