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Experts are coming up with bullish estimates for the

S&P 500

again, despite having overshot in the past.

An average of four predictions by top market strategists, as calculated by

TheStreet.com

, shows the S&P 500 will finish next year at 1068.75 -- a hearty 20% gain over Wednesday's close of 891.

At this time last year, few experts believed that 2002 would be another down year for the S&P 500. After all, the index hasn't posted three consecutive years of losses since the Great Depression. Although they appear to be mistaken about this year (the S&P 500 is down approximately 23% with two weeks left before the end of the year), most strategists are nonetheless convinced that a fourth year of losses is unlikely.

To be sure, 2002 was chock-full of unforeseen events, with alleged malfeasance at the highest ranks of

WorldCom

,

Adelphia

,

ImClone

(IMCL)

TheStreet Recommends

and

Tyco

(TYC)

, as well as Harvey Pitt's resignation as chairman of the

Securities and Exchange Commission

and a shake-up of President Bush's economic team.

Looking ahead, some analysts seem to think they are being conservative enough. "Following unprecedented forecast errors in recent years, consensus estimates appear in the realm of reason," said Morgan Stanley strategists Steve Galbraith and Byron Wien in a report.

The strategists are forecasting 2003 S&P 500 earnings, based on an average calculation, of $52.40 a share, a 10.7% gain over current year forecasts of $47.34 a share, according to Thomson Financial/First Call. Their targets assume a moderate rebound in the economy, fostered by a favorable environment for interest rates.

"The earnings estimates for this year look reasonable," said Galbraith and Wien. "Unlike 2002, the forecasts for 2003 are not calling for a sharply upward sloping hockey stick."

Nevertheless, the forecasts assume an average price/earnings ratio of 20 for the S&P 500, above historical levels. "Looking at a range of traditional valuation metrics, we've come a long way down, but we're still above long-term averages," said Galbraith and Wien. "By most measures, stocks aren't dirt cheap yet."

In terms of asset classes, the experts argue that stocks are attractive relative to Treasuries. "It is not that the prospects for equity returns are that high," said UBS Warburg chief strategist Edward Kerschner in a report. "It is more that the yields from bonds and money markets are so low."

Still, uncertainties, including a potential war in Iraq, weigh on the strategists' 2003 forecasts. "The scope of the modest gains that should accompany profit growth and monetary stimulus early in the new year will rest on some pretty precarious structural footings later in the year," said Kerschner.

While the strategists maintain similar macro views, with respect to expectations for earnings and economic improvements, they are somewhat divided in their recommendations for their model portfolios. Galbraith and Wien are underweight financial stocks, while Tobias Levkovich of Salomon Smith Barney is overweight the group. Kerschner assigns a market weight rating to the sector.

Levkovich is underweight tech, while Galbraith, Wien and Kerschner give it a market weighting. And Kerschner is underweight health care, a top group for Joseph Battipaglia of Ryan Beck.