If you thought you'd heard all the bad news about earnings and economic indicators you could possibly tolerate, brace yourself.

Economists at several of the top fund complexes believe more bad news about layoffs, unemployment, consumer debt and the like could continue to put downward pressure on the markets through the first half of 2001.

But most fund economists don't expect the slowdown to degenerate into a recession. In fact, most see the markets rallying at least modestly by the middle to the end of the year -- spurred by further rate cuts, corporate restructuring and fundamentally strong earnings potential at many firms.

In the meantime, experts see a few areas where money can be made in 2001, namely in bonds and a handful of consumer, technology, European, energy, health care and financial stocks.

David Kelly, economic advisor at

Putnam Investments

, and Bill Dawson, chief investment officer of fixed income at

Federated Investments

, believe investors would be wise to include high-yield bonds or bond funds in their portfolios. In fact, Dawson believes bonds will continue to be good investments into 2002 and possibly 2003. (For more on high-yield bonds, check out our interview with

Barry Evans of John Hancock funds.)

As for stocks, Kelly says investors should not be spooked by lofty

price-to-earnings ratios when the average stock in the

S&P 500

sports a P/E of around 20, he says. Investors just have to look harder for companies with strong earnings potential, which can be found in almost every sector, he says.

Marci Rossell, chief economist at

Oppenheimer Funds

, agrees that high multiples are warranted in some cases, especially in the technology sector. In particular, Rossell likes fiber-optic stocks, arguing that while "many of these stocks still have relatively high valuations, such P/Es are justified given their long-term trajectory."

Philip Ferguson, senior investment officer with

AIM

, believes that relative to other sectors, health care and energy stocks continue to show promise for 2001, as they did in 2000. Lower interest rates should also give a boost to investment companies, he adds.

And Jeff Everett, executive vice president at

Templeton Global Advisors

, still believes certain sectors of the market, such as consumer and telecom stocks, are cheap relative to their earnings potential, and is continuing to buy them.

For the 2001 economic outlook overall, many economists believe fundamental earnings potential coupled with additional rate cuts and corporate restructuring will improve the economy by the end of the year. Combined with low inflation, this lays "a solid foundation for an economic rebound" by year-end, says Kelly.

Dawson believes rate cuts will benefit not only the stock market but also the retail market as well. If the

Fed

doesn't drag its feet on the rate cuts by drawing them out into the second quarter, the cuts should effectively jump-start the economy, Kelly says. Kelly and Dawson are in agreement that an improvement in consumer spending is key to an economic rebound, and believe such an improvement is almost certain to occur. "I have great faith in the lust for spending of American consumers," Kelly says.

Templeton's Everett is optimistic that the economy can continue to grow, albeit at a slower rate. "As the markets stabilize, economic growth should plateau at 2.5% to 3% this year," says Everett. "We'll still be in a growth phase, but at a slower rate." This should not be surprising, according to Everett, given that we've just come through four years of 4%-plus annual economic growth coupled with 4% unemployment or less.

Another reason experts hold out promise for the second half of the year is the long-term effect of all the bad news we're slogging through. Bad news, it would seem, can sometimes be good: Fund economists say that knocking high-P/E stocks off their pedestals and restructuring should have positive effects on corporate earnings.

While the huge number of recent layoffs -- and the resulting effect on consumer and business confidence -- are painful, the restructurings are necessary, according to Oppenheimer's Rossell. "Firms must restructure to restore strong profitability. This means job cuts, correcting inventory overhang and slashing capital spending to deliver a stronger bottom line," she says. "This process began in the fourth quarter of last year, is likely to last for the next two quarters and will probably result in improved profit growth by the second half of 2001."

Not surprisingly, the fund experts recommend sticking with the market for the long term, even while considering the possibility of a recession.

"In the last eight recessions, the stock market has hit bottom and begun to rebound months before the economy," says Kelly. "I don't think people should wait until they see the whites of the eyes of an economic rebound before they invest money."