Get Ready for Another Late Rally

The tides pushing companies back to shore are Federal Reserve Chairman Alan Greenspan's zeal to deny those very things to the middle class in the U.S. by raising interest rates over his head like an carnival muscleman, a continuing escalation in oil and gas prices, a runaway federal deficit that draws funds away from more productive uses and a persistent erosion of job growth and consumer confidence.

My guess is that the wind will battle to a tie through the end of the year, but the tide will succeed in the end, because, eventually, the Fed virtually always gets its way, and because the market typically stumbles in the second year of a presidential administration -- 1990 (-9%), 1994 (-2%) and 2002 (-23%) being prime examples.

Here are four guideposts for the coming turbulence:

1. Earnings Growth Surprises

In June, analysts estimated that S&P 500 companies' earnings would rise 15.1% (annualized) in the third quarter. But it looks like they're coming in at more like 17.9%, according to Thomson Financial Research. A lot of that is energy, of course, with some major oil companies' earnings estimates up 29% to 56% in the past three months (the highest for any sector since early 2003). Despite the depressing effect of Hurricane Katrina on insurers, financial companies are also expected to come in strong, with a 21% annualized growth rate -- primarily due to easier comparisons to last year, when insurers suffered through a series of Florida hurricanes.

On the downside, according to Thomson data, the sectors most likely to suffer stumbles are chemical and other basic materials makers, which are forecast to see income decline by as much as 5% overall, and consumer discretionary companies such as General Motors(GM Quote) and Walt Disney(DIS Quote). Look for modest gains in the third quarter but warnings of poorer results ahead in the fourth quarter and 2006.

2. Energy Stocks Surprise

This is a tricky one. Energy exploration companies' third-quarter earnings will show a big boost due to higher prices for crude oil and natural gas. Many cynics will figure that this is already discounted in the stock prices, and figure the sector will sell off as energy prices moderate. But it's really not that simple.