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2005: Gray, With Mild Returns

With 2005 fast approaching, Wall Street analysts are once again gazing into their crystal balls. What they see is a dull but mildly positive year for stocks.

Although strategists are calling for higher interest rates and a weaker pace of earnings growth next year, they believe stocks will inch up as the economy continues to grow at a respectable pace.

The median forecast among the major brokerages is for a 4% increase in the S&P 500, although estimates range from a decline of 4.6% to a gain of 10%.

One of last year's most accurate prognosticators, Tom McManus of Banc of America, is actually among the more bearish pundits this year, saying the market could remain flat or fall slightly over the next 12 months.

"We continue to believe that stocks remain a riskier bet in 2005 than in the recent past," he said. "While both earnings and [price-earnings] multiples have improved from 2002-2003 levels, stocks have significantly outpaced their long-term performance trend."

McManus worries that inflation will escalate next year and that rising interest rates will trigger a "consumer downshift."

While inflation has remained tame in 2004, price pressures are starting to show up at the wholesale level, and some analysts fear that higher consumer prices will follow.

Retailers and auto companies have attracted buyers this year with aggressive discounts and incentives. But some say these offers are unsustainable in light of rising interest rates and high energy costs.

If prices do go up and the Federal Reserve raises rates as much as analysts expect next year, consumer spending could potentially falter, particularly given the low savings rate, high debt levels and lack of fiscal relief. Rates are expected to climb to between 3.25% and 3.5% by the end of 2005 from 2.25% currently.

Good Call
Can Wall Street strategists make it two solid years in a row?
Brokerage Strategist S&P 2004 Target S&P 2005 Target
Goldman Abby Joseph Cohen 1250 1325
Lehman Chip Dickson 1150 1300
Smith Barney Tobias Levkovich 1025 1300
J.P. Morgan Abhijit Chakrabortti 1120 1275
Merrill Lynch Richard Bernstein 890 1250
Prudential Ed Keon N/A* 1250
Morgan Stanley Henry McVey 1200 1250
Bear Stearns Francois Trahan 1100 1200
Banc of America Tom McManus 1160 1200
UBS Gary Gordon 1150 1150
*Ed Keon replaced Ed Yardeni, who had a 2004 target of 1260.
Source: Brokerages
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