Halfway through 2005, the stock market has nothing to show for itself. And if you're waiting for the

Federal Reserve

to stop raising interest rates before you buy equities, don't hold your breath.

Last week, the Fed logged its ninth straight quarter-point rate hike and repeated its "measured pace" mantra, leaving no end in sight to a tightening campaign that began more than a year ago. Stocks tumbled, and the spread between short- and long-term interest rates continued to narrow, exacerbating the "conundrum" first mentioned by Fed Chairman Alan Greenspan.

Conventional wisdom dictates that when the monetary gatekeepers raise short-term rates, long-term rates should follow. This time around, they've fallen, a phenomenon that recurred on Thursday after the Fed's announcement.

Unfortunately for investors, the simplest explanation of the market's thirst for low-risk investments like 10-year Treasury notes is that people don't see good investment opportunities anywhere else.

Well, almost. The real estate market remains red hot, leaving pundits to busy themselves with bubble babble. Commodities are also producing, with crude futures making headlines at $60 a barrel. Hedge funds and private equity are in fashion, having jumped headlong into the mergers-and-acquisitions craze. And the dollar is on the mend.

Meanwhile, aside from their lack of progress in the first half of 2005, stocks remain at the tail end of a bull run. The

S&P 500

has gained 31% since July 2002, when the economy was battling a recession. The

Dow Jones Industrial Average

has added 18% over that period, while the

Nasdaq

is up 55%. Still, none of the indices have climbed back to where they were five years ago, in the days of irrational exuberance.

So, can stocks break out of their range-bound ways in the back half of 2005? Or is a flattening yield curve signaling that the U.S. economy is headed for another slowdown? An informed guess might lean bearish: With all of the pitfalls facing economic growth, stocks might very well remain too high.

At around 1191, the S&P trades at just over 18 times Wall Street's consensus estimates for corporate earnings in 2005. That sounds cheap to traders who haven't shaken their nostalgia for the tech bubble. Back in the 1990s, the S&P soared over 28 times GAAP earnings on lower profits. Now, prices have come way down and profits have roared back, so buying stocks looks like a no-brainer.

However, compared with the S&P's average price-to-earnings ratio since 1935 of 15.7, stocks look a bit more pricey.

"Investors are conservative now compared to five years ago, but when you look back further in history, that's not necessarily the case," said Standard & Poor's market equity analyst Howard Silverblatt.

Meanwhile, economic growth appears to be on the wane. The government reported last week that GDP grew 3.8% in the first quarter, down from its annual growth rate of 4.4% in 2004. Furthermore, although corporate profits remain strong by historical standards, their growth is also slowing.

Wall Street analysts expect year-over-year growth in corporate profits for the S&P 500 to slow to 11.9% in 2005, down from 20.2% in 2004, according to consensus estimates reported by Thomson First Call. While the second quarter is expected to see the slowest growth of the year, at 7.3%, bulls have pinned their hopes on a stronger second half. Analysts expect profits to add 15.1% in the third quarter, down from last year's pace of 16.8%. For the fourth quarter, they're projecting growth of 12.2%, down from last year's 19.7%.

"We're getting negative surprises every day," said Tom McManus, an equity strategist with Banc of America. "An increasing number of companies are finding it difficult to meet expectations. At these valuations, positive surprises are not a big surprise, but negative surprises are big. I think the odds of any given company reporting a disappointing number have risen."

Along with facing high expectations, the economy is navigating myriad threats to growth. The energy market, for instance, has powered earnings growth on the shoulders of soaring crude prices. But oil prices at current levels are also an economic wild card. On some level, oil prices are a tax on consumers and businesses, and no one knows the effects of that strain.

Lending momentum to oil, the U.S. is waging an expensive war in Iraq and Afghanistan, and polls show Americans are growing increasingly doubtful about its odds for success. That exacerbates wide deficits being run by the federal government. Couple that with a sizable trade gap, and the expansion looks more precarious.

Consumers have also developed a massive debt overhang, driven mainly by soaring home prices and low interest rates that gave rise to a wave of refinancings. If long-term interest rates ever start behaving normally, many market watchers worry that it would lead to the bursting of a real estate bubble -- something that everyone agrees would amount to a huge blow to the economy.

The good news is that recent wage growth has provided a boost to consumers' balance sheets. For the first time in years, wage growth has outpaced growth in consumption spending so far in 2005, according to government statistics. Part of that comes from a 17% rise in interest payments in April taking a chunk out of consumption spending and indicating that debt levels are starting to be a headwind. But the 7.6% rise in wages that month, up from the 4.9% in the same month last year, makes up a much bigger part of the equation.

If wage growth continues to increase, consumer spending could bail out the expansion and help stocks weather whatever storms may lie ahead. Meanwhile, Greenspan's rate-tightening campaign appears poised to continue indefinitely. It may not inspire any gains in the stock market, but higher rates could at least give the Fed a lever to pull should something go wrong.