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By Joseph Lisanti Recent strength in stocks has given some people the confidence to predict that equities are headed straight up. But we believe the market is likely to bounce within a fairly tight trading range through the end of the year.
Some of the factors we think will cause crosscurrents in the market in the weeks ahead are: seasonal strength vs. technical weakness; good corporate earnings vs. decelerating profit growth; and solid economic growth vs. a potential consumer pullback.
There is no question that the fourth quarter is usually the best period for stocks. In the years after World War II, the S&P 500 has chalked up an average advance of 4.3% in the final three months of the year. But Mark Arbeter, Standard & Poor's chief technical strategist, believes that the easy gains from the October low have already been seen. "Longer-term technical indicators and chart formations remain bearish," he says. Arbeter sees S&P 500 chart resistance and trendline resistance becoming a factor between 1220 and 1245.
Corporate profits remain strong. With 80% of the stocks in the S&P 500 having reported their September-quarter earnings, we estimate a 12.3% gain from the same period a year ago. That would represent the 14th consecutive quarter of year-over-year double-digit percentage growth in S&P 500 operating earnings. But for the full year, we expect growth of 14% in index operating earnings, down from a 24% increase in 2004.
The economy continues to do well. Gross domestic product increased at an annual rate of 3.8% in the third quarter, according to the government's advance estimate. Third-quarter nonfarm productivity surged 4.1%, the best showing since the second quarter of 2004. But consumer confidence continued to fall, and unit vehicle sales dropped sharply in October, both of which we attribute to still-high energy prices.
Until something develops to push stocks meaningfully in one direction or the other, we think a trading range is the likely scenario. Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook