Home on the (Trading) Range

S&P doesn't see a breakout to the upside for stocks yet, but conditions may improve after the election

By Joseph Lisanti

After last month's brief drop to 1,063, the S&P 500 has risen back into the confines of the 1,080 to 1,160 trading range that has existed for much of the year. With the economy improving and corporate profits surging, what's holding back stocks?

Although much news is positive, we see several factors restraining equities. Our analysts estimate that profits on the S&P 500 are likely to be at an all-time high in 2004, some 22% above last year's level. But growth is decelerating. For 2005, we project only a 9% advance.

And though it's about a month until companies begin reporting their third-quarter earnings, the confessional pre-announcement season is underway. So far, more corporations are guiding analysts' estimates lower than was the case at this time last year. In particular, technology stocks, which had powered the market higher in 2003, have lagged this year as tech earnings warnings have increased.

Oil has retreated from last month's peak, but prices remain higher than in recent years. And the potential for disruption of the tight oil supply is still there, in our opinion.

We also see the market's seasonal patterns as a strong argument against a surge in stock prices at this time. September, historically, is the weakest month, and October is infamous for nasty surprises, including crashes in 1929 and 1987.

In election years since 1948, the current quarter has experienced the smallest gains, averaging only 1%. This year, we expect the sideways action to continue, perhaps to Election Day. That's because we still see the race for President as too close to call. Two recent polls, conducted over the same period, came to wildly different conclusions. One showed President Bush leading by 13 percentage points; the other had him virtually tied with Senator Kerry. And, of course, the Electoral College complicates the question of who is ahead.

Voters and investors will have a clearer picture after the election.

Lisanti is editor of Standard & Poor's weekly investing newsletter, The Outlook

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