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Markets & Finance

A Damper Housing Market

From Standard & Poor's Equity Research

Here are the notes from Standard & Poor's Investment Policy Committee meeting, held on Wednesdays.

Longer-Term Economic Outlook

We at S&P expect mortgage rates to continue rising over the rest of this year and dampen home sales further. House price appreciation continues to soften, which is indicative of the below-peak demand, in our opinion. Builders are likely holding their asking prices back to sell units. Also, new home price appreciation would likely be even weaker if the data could factor in incentives and upgrades, which are also supporting the current pace of sales.

We now see a 35% chance of recession in 2007, due to heightened tensions in the Middle East.

Fundamental Outlook

S&P equity analysts project second-quarter operating earnings for the S&P 500 to advance 12%, vs. their June 28, 2006, growth estimate of 9%. Full-year 2006 earnings are now projected to rise 13%, compared with the earlier forecast of 12%.

The S&P MidCap 400 and SmallCap 600 indices are expected to post 2006 operating gains of 18% and 17%, respectively. The quality of earnings appears to be good, in our opinion, yet managements have been reluctant to raise guidance.

S&P's Asset Allocation

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