NEW YORK (CNNfn) - With major U.S. stocks indexes flat year-to-date, 2000 has been a tough time to make money in the markets. So why are so many Wall Street gurus smiling?
Because they got it right.
After years of underestimating the ferocity of the bull market, analysts with tame outlooks seem downright clairvoyant in these tempered times.
"This is one (year) that's gone according to the script," said Ned Riley, chief investment strategist at State Street Global Advisors.
Investors used to double-digit returns may want to re-write that script. But analysts, by and large, are sticking to it. With less than four months left in 2000, many financial professionals continue forecasting just moderate gains for U.S. stock indexes -- gains that pale to those of years past.
A return to normalcy
Abby Joseph Cohen, the influential Goldman Sachs strategist, is among them. She began the year with a modest outlook. And that hasn't changed. Cohen sees the S&P 500 at 1,575 by year's end. The 7.2 percent annual advance would be puny compared to 1999's 19.5 percent surge. Cohen eyes a Dow Jones industrial average at 12,600, up 9.6 percent on the year but well below 1999's 25.2 percent leap.
The Dow closed Thursday at 11,259.87 while the S&P 500 checked in at 1,502.51.
 "Late summer is usually a good time to ponder the remainder of the year," she wrote in a recent note to clients.
Like many analysts, Cohen sees profit growth slowing under the weight of the Federal Reserve's six interest rate hikes since June, 1999. Still, she contends the economy remains healthy, something few economist disagree with.
"Our assumption, not yet proven, is investors will become increasingly comfortable with the idea that profit expansion will be sustained, albeit at a less vigorous pace, over the next several quarters," the strategist wrote.
Many investors know this lack of vigor all too well. The Nasdaq composite index, which surged more than 85 percent in 1999, closed Thursday about 28 points higher on the year. The Dow is down about 2 percent in the period with the S&P 500 up 2 percent. The nation's two largest mutual funds, Vanguard's 500 Index fund and Fidelity's Magellan Fund, are only modestly higher this year.
What little difference eight months in the markets makes. As 2000 began, the major U.S. stocks indexes had surged to record highs. After continuing to climb early this year and then plunging in April, the indexes are starting September about were they began the year.
The relative flatness doesn't come as a complete surprise. Many analysts at the start of the year forecast that the double-digit returns of the late 90's could not continue under a Federal Reserve intent on raising interest rates.
At some point, history dictated that investors would stop paying stratospheric prices for technology stocks and reward long-ignored sectors that had become bargains. That has begun to happen. The price of a barrel of oil, which had fallen to the low teens last year, could only rise, effectively enacting a tax on consumers and businesses. And companies would warn about missing profit targets. All this has happened.
What Fed?
Like Goldman's Cohen, Christine Callies, chief investment strategist at Merrill Lynch, has a year-end S&P 500 target of 1,575. She bases her outlook mostly on the expected rate of profit growth for the large companies that comprise the index. While traditionally sensible, a forecast like this flies in the face of the recent past, when valuations of many stocks got stretched well beyond earnings growth.
The Fed, Callies said, is on the sidelines for the rest of the year. Such inaction would represent a trend. Faced with evidence of a cooling economy, the central bank held rates steady at its last two meetings. Stock investors, who fret that steeper borrowing costs will crimp corporate profits, like the idea of steady rates.
And State Street's Riley says interest rates, at their highest point in nearly a decade, may even start falling next year. Until then, he's most optimistic for the Dow and S&P.
"I would suspect that the Dow has the capability of pushing beyond 12,000 by year-end," he said.
He sees the S&P 500, a broad market index, at around 1,580, being lifted as stock investors continue diversifying. Further, the prices of stocks in the Dow and S&P, he says, have already adjusted to expectations for slower economic growth, making them less vulnerable to any loses. Many economists forecast economic expansion at something closer to 4 percent next year, following a 5.3 percent surge in the nation's gross domestic product in the second quarter.
 Riley is less sanguine about the Nasdaq, home to the nation's most expensive stocks.
"Technology's high prices make them vulnerable," said Riley, who sees the Nasdaq at 4,100 by year's end - essentially flat for the year. He continues to favor financial stocks, which he said should benefit as the industry consolidates and interest rates fall.
Mind games
For any forecaster, sentiment is always a wildcard. This spring's speculative froth, sparked by greed, may have been as nonsensical and unpredictable as the ensuing plunge that was bred out of fear.
How should investors value any stock? Consider Oracle (ORCL: Research, Estimates), a technology blue chip. The maker of database and e-business software trades at a relatively expensive 42 times earnings. But the company is expected to post profits of 90 cents per share next year, up 30 percent from year-ago figures. Compare that to Lehman Brothers (LEH: Research, Estimates), which trades at a mere 13 times forward earnings. The investment bank is expected to earn a powerful $12.19 per share next year. But that's only a slight gain over 1999's results.
One stock is expensive because it's a fast grower. The other is cheap because it's a slower grower. Oracle may be more vulnerable to a fall; Lehman probably less so. But which stock will have a better 2001? The answer depends as much on investor sentiment as anything else.
Jeffrey Applegate is the chief investment strategist at Lehman Brothers. But he appears to be among the analysts who might bet on Oracle. Bullish on tech stocks, he sees the Nasdaq at 4,600 by year's end, up 13 percent in 2000.
Applegate views globalization as a huge boom to the growth of technology companies. His outlook for a surge in productivity, which eases the threat of inflation, is also a positive.
"If our outlook is correct, very rich valuations for the best tech stocks will persist," Applegate wrote in a recent note. "Maybe for years."
A year ago, Applegate's outlook would have raised nary an eyebrow. But as reality sets in and fundamentals like profits start to matter again - witness the crash of dot.coms - overly bullish forecasts are now the exception rather than the rule. 
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