I hear people say "Too soon." and everyone starts laughing. (I just fake laugh) What does it mean?
The UrbanDictionary reference mentioned by others explains the literal meaning:
A phrase used to respond to someone making a comment that was intended to be funny, but touches on subject matter that shouldn't be joked about, usually because it was a recent event . . .
But as a response to a joke, "too soon" is almost never meant literally. If a person heard a joke about a subject they sincerely felt was inappropriate to joke about, they probably wouldn't say it was "too soon", because that would imply that the subject might be acceptable to joke about in the future. People almost never change their feelings about which subjects are off-limits for comedy.
You will sometimes hear this phrase when the subject of the joke was genuinely a tragedy, but it occurred a very long time ago, at least beyond living memory. The ironic meaning is that it is not too soon to joke about the subject. The humor is in lampooning people who would be offended by jokes about more recent tragedies.
Another common use of this phrase is when the thing being joked about was recent, but not genuinely a tragedy. The humor is in exaggerating the significance of the subject by suggesting that it should not be joked about.
Finally, you may hear this phrase when the subject of the joke was both recent and genuinely a tragedy. Comedians sometimes even follow one of their own jokes by rhetorically asking the audience, "Too soon?" This is another way of mocking people who might take offense. It is simultaneously an acknowledgment and a flippant dismissal of the idea that the subject of the joke may have been inappropriate.
A phrase is said to respond someone's comment which is supposed to be funny but the original matter is not.
Tom: I think I'm not practicing hard. And taking my tennis match lightly. Mike is slow but he's a good player.
Eric: Yeah, You'll be like Robin Soderling beating Rafael Nadal in French Open 2009!
Tom: Too soon!
The major upset is described there by Eric and Tom agrees.
Reference: UrbanDictionary (After Ben Kovitz's comment. Thanks)*