Is Wall Street too bullish?

With stocks seesawing since the start of the year, earnings season has taken on more importance as a guide to stock market value. As a result, some big caps have been stumbling.

So the adage "As January goes, so goes the year" has created some concern among traders who see the swings as signaling a negative outcome. But when considering where the market is heading, it's worth taking a look at small caps, a group that has been outperforming recently.

The Dow has felt the brunt of high-profile earnings pain, with big names like IBM, Intel, Johnson & Johnson, General Electric and Verizon delivering a blow as they declined on disappointing earnings news. The Dow is off 1.2 percent since the start of the year. The S&P 500 was off just 0.2 percent Wednesday afternoon, trading just a few points below its Dec. 31 close of 1,848.

But the Nasdaq and small cap Russell 2000 tell a different story. They are up 1.6 percent and 1.4 percent, respectively, since the new year. While the market has churned sideways, the Russell has been doing what small caps are expected to do in January—outperform—creating a "January effect" driven by new money coming into the market.

"Small stocks have been up," said Richard Bernstein, CEO of Richard Bernstein Advisors. "Part of what's happening in large cap land—multinational exposure is hurting them. The market is starting to recognize the difference, that whatever is going on here in the United States is healthier than what's going on in the emerging markets."

But the monthly fund managers survey, released by Bank of America Merrill Lynch, shows that U.S. managers were more bearish on U.S. stocks, with 37 percent seeing them as overvalued, one of the highest readings in the past 14 years, according to Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research.

Meanwhile, the fund managers in BofA's global survey were more bullish on the global economy, with 75 percent expecting it to improve this year, up from 71 percent last month. Seventy-two percent saw U.S. stocks as overvalued, and a net 7 percent saw stocks as overvalued, the highest level since 2000.

"If you were really standing back and trying to describe the concerns and investor positioning, it's very much the 'if it ain't broke, don't fix it' mentality out there," Hartnett said.

"What you're always on the lookout for is events that could change the mood," he added. "If you're a bull you've really got to say, 'Look, there's more to go,' because there's a lot of corporate cash that can be deployed in the economy and investor cash that can be deployed in the market."

The calls for 2014 from Wall Street's top range from a flat market this year based on their S&P 500 targets to a rise of 10 percent to 15 percent. A sampling of their forecasts is in the chart.

"They're getting more bullish, but I bet if you went back and looked historically, this is pretty normal for this part of the cycle—that everybody is bullish," Bernstein said. "The skepticism is waning. That should happen, but when skepticism wanes and it becomes overenthusiastic, that's a big difference. But I don't think we're there."

Hartnett said it's interesting that none of the strategists see a lasting decline in stocks. Some, like Bob Doll of Nuveen, expect a 10 percent drop before the S&P resumes its rise, ending the year at 1,950.

"I think the best case for the bears is that no one's looking for the market to fall," Hartnett said. "The best case for the bulls is the survey shows there's a lot of cash on the sidelines."

The market is becoming more expensive, he added, and value investors are having a tough time finding opportunities.

"One of the biggest pain trades for the past five years is long volatility," Hartnett said.

Even so, he added, "plenty of things could go wrong: the Middle East, China, housing in the U.S. But ... central banks have to lose some credibility for volatility to pick up. You either need a 1994, where the Fed looked behind the curve; or a 1998 event, where emerging markets cause forced easing by the Fed."

Even with big names missing this earnings season, the fourth quarter had a pickup in positive surprises on the top line compared with the third. Though revenue growth is weak, about 66 percent have beaten revenue targets.

Profit growth will not be robust but "will continue to accelerate from here," Bernstein said. "That's important because ... the profit growth cycle ... troughed about a quarter or so ago. Earnings growth will continue to improve but in an anemic fashion. Everyone's saying if profit margins contract, that would be bearish."

But declining profit margins do not need to be bearish, according to Bernstein.

"The whole 1980s bull market was built on declining profit margins," he said. "If margins contract, it doesn't mean the market goes down. It all becomes a market share story. Our favorite remains small cap industrials. By far and away that's our favorite. They're gaining market share. ... As capital spending picks up, these guys are going to benefit big time. I think both cap spending and M&A will pick up."

About 80 S&P 500 companies had reported as of Wednesday morning, and 61 percent beat earnings estimates. Earnings are expected to increase 7.2 percent this quarter, based on actual reports and estimates for companies yet to report, according to Thomson Reuters.

—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.