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Could a Stock-Market Rally Really Be Around the Corner?

BOSTON ( TheStreet) -- The next few weeks will determine whether investors make or lose money in 2011.

Yet, many have left the market, frozen by fears that Europe's debt crisis will spread from bank to bank, and then to the U.S., tipping us it into a recession.

Investors' concerns are understandable. September's 7% stock-market swoon may be a precursor of what's to come in the fourth quarter. The best strategy is to take a deep breath, tune out the noise coming from Europe and focus on fundamentals here at home.

It's hard to believe, given all the negativity in the air, that U.S. companies are in good shape -- revenue is up and profit margins are wide. So rehashing 2008, or other volatile market periods, and extrapolating them to the current one is not helpful.

Here's the best take on current conditions, according to economists and market strategists: A recession is unlikely, and investors have already factored in a pretty bad case for stocks, as witnessed by the near-bear market in a period of record-setting corporate earnings, and an outlook of more of the same.

The September jobs reports was a slim positive (a gain of 103,000 jobs) and that, combined with improving car and retail sales, could help boost consumer confidence going into the holiday season, which in turn could help get corporate America spending and hiring.

Supporting that view, there is a growing chorus of analysts predicting a big fourth-quarter rally, although investors should keep a keen eye on companies' 2012 projections, usually given with third-quarter results, as it looks like earnings growth will slow next year. Alcoa (AA) kicked off earnings season yesterday and said profits lagged behind analysts' estimates.

"To be clear, we do not believe this is 2008 again, especially given the increasingly conservative nature of corporate America and its continued emphasis on fundamental stability," wrote Brian Belski, Oppenheimer's chief global strategist, on Oct. 7.

Concurrent with that view, Citigroup (C) Global Markets said Tuesday that by its analysis, "financial conditions still suggest a low probability of recession, near 25%. U.S. recessions are marked by a broad-based plunge in production and employment across most industries," and the latest reports say that's not going on now.

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