Oct. 31 (Bloomberg) -- Investors became so pessimistic about the prospects for U.S. stocks that evidence of economic and earnings growth may spark a rebound from October's losses.

Confidence indicators from Merrill Lynch & Co. and State Street Associates fell this month to the lowest since the 1990s, suggesting many investors who wanted to sell shares have already done so. A record number of shares in New York Stock Exchange- listed companies were borrowed and sold, a bet on lower prices.

So many people are ``leaning to the neutral or negative side'' that ``it wouldn't take much to push this market up,'' said Philip Dow, an equity strategist at RBC Dain Rauscher Corp. in Minneapolis.

Stocks cut their losses last week as a government report showed the economy accelerated last quarter and an inflation measure increased at the slowest pace in more than two years. The Standard & Poor's 500 Index rose 1.6 percent to 1198.41, bringing its October slide to 2.5 percent.

Two-thirds of S&P 500 companies to report third-quarter results so far have exceeded analysts' earnings estimates, and the percentage is above the historical average. Procter & Gamble Co., Time Warner Inc. and Comcast Corp. are among the companies scheduled to release results this week.

Stock prices have fallen this month in the face of economic and earnings reports and a 7.6 percent drop in oil prices, which set an all-time high in August after Hurricane Katrina.

Fed's Rate Decision

The Dow Jones Industrial Average has dropped 1.6 percent for the month and the Nasdaq Composite Index has slipped 2.9 percent. Both benchmarks trimmed their losses last week, when the Dow industrials rose 1.8 percent to 10,402.77 and the Nasdaq Composite gained 0.4 percent to 2089.88.

Concern that the earlier surge in fuel costs will slow profit growth, spark inflation and spur the Federal Reserve to keep raising interest rates has contributed to the losses. Crude-oil prices have climbed 41 percent this year in New York trading. Natural-gas futures have more than doubled.

Tomorrow, the central bank's policy makers will raise borrowing costs for the 12th consecutive time, to 4 percent, according to economists in a Bloomberg News survey.

``I don't think the sentiment's going to change until we have some sense that the Fed is not going to continue to put pressure on the economy to slow down further,'' said Ernie Ankrim, who helps oversee $135 billion as chief investment strategist at Russell Investment Group in Tacoma, Washington.

Declining Confidence

Global investors were the most pessimistic about U.S. stocks in more than six years, according to a survey released Oct. 18 by New York-based Merrill Lynch, the largest securities firm by the number of brokers. The outlook reflected concern that profit growth may slow and interest rates may rise.

State Street's investor confidence index, based on an analysis of about 15 percent of the world's tradable assets by the Boston-based firm, dropped this month to the lowest reading since its 1998 introduction. North America was mainly responsible for the decline, as a regional index sank by 6.1 points to 93.5.

Optimism on U.S. stocks dropped in the week ended Oct. 21 for the fifth straight week, according to Investors Intelligence, a newsletter in New Rochelle, New York. The 44.8 percent reading was the lowest since April 29. Another 29.2 percent of advisers were bearish, near a six-month high.

``Short selling'' statistics illustrate the degree of pessimism. The number of shares in NYSE-listed companies that were borrowed and sold rose this month to a record 8.65 billion, or 2.4 percent of the stock outstanding, the Big Board reported.

Earnings `Doing Fine'

Investor sentiment reached ``panic'' levels this month, according to Tobias Levkovich, chief U.S. equity strategist at Citigroup Investment Research in New York. There is an 85 percent probability that stocks will be higher in six months, he said.

``It tends to be better to buy when it isn't clear why you should buy and most people should be pretty worried,'' Levkovich said. He expects the S&P 500 to increase to 1300, an 8.5 percent gain, by the end of the year.

Share prices rose at the end of last week after the Commerce Department said the economy grew at a 3.8 percent annual rate in the third quarter, above the second quarter's 3.3 percent pace.

``If you talk to most economists, they tell you we're doing okay and earnings are doing fine,'' said RBC Dain Rauscher's Dow, who sees the S&P 500 rallying as much as 10 percent by year-end.

Third-quarter results suggest companies weathered the impact of Hurricanes Katrina and Rita, such as higher fuel costs. Among the 348 members of the S&P 500 that reported through last week, 65 percent exceeded estimates, according to Thomson Financial. The proportion exceeds the 59 percent average since 1994.

`Fairly Solid' Earnings

``Good corporate earnings could drive the market higher'' because the prevailing sentiment is so negative, said Richard Sichel, chief investment officer of Philadelphia Trust Co. in Philadelphia, who oversees $1.5 billion.

Disappointing results from companies including Pfizer Inc. may have obscured a ``fairly solid'' earnings season, Citigroup's Levkovich wrote in a note this month. New York-based Pfizer, the world's biggest drugmaker, cut its profit forecast for 2005 and withdrew its 2006 and 2007 projections this month.

Procter & Gamble, the largest U.S. household goods maker, will report earnings tomorrow. The Cincinnati-based company may say quarterly profit climbed to 76 cents a share from 73 cents a year ago, according to analysts surveyed by Thomson.

Time Warner, the world's No. 1 media company, and Comcast, the largest U.S. cable-television company, will also report this week. New York-based Time Warner will announce earnings on Nov. 2, and Philadelphia-based Comcast will follow a day later.

`Not a Guarantee'

Not all sentiment readings show extreme bearishness. A Merrill gauge based on six indicators moved up to a ``neutral'' reading from ``oversold,'' last week, according to a note from David Bowers, chief global strategist in London.

Yet assets in Rydex Investments mutual funds that seek to profit from falling stock prices are close to levels at ``market turning points'' in 2003 and 2004, said Carl Swenlin, president of Decisionpoint.com.

``We've reached an extreme in bearishness that would support a rally,'' said Swenlin, who runs the technical-analysis research site from Redlands, California. ``But that's not a guarantee.''

To contact the reporter on this story: Daniel Hauck in New York at dhauck1@bloomberg.net.

Last Updated: October 31, 2005 00:01 EST