(FORTUNE Magazine) – How does A.G. Edwards outdistance the S&P 500--and many bigger rivals? Stuart Freeman, the strategist who oversees Edwards' focus list, says the firm's St. Louis location probably helps: "We're less likely to get caught up in the psychology of the moment." But it all starts with a number-crunching economic analysis that predicts the health of 50 industries. FORTUNE contributing editor Lawrence A. Armour called Freeman the other day and led off with the question on everyone's mind.

Stuart, are we apt to see 10,000 in the Dow Jones industrials in the near-term future?

I think we've seen the bottom of the correction. The psychology rotation we've gone through the past few weeks sliced 18% off the average NYSE stock and 22% to 23% off the average NASD stock. We're likely to get a summer rally--not too brisk, maybe 9250-9300 by August--followed by a consolidation to the 8500-8600 area in the fall. But then people will begin to look ahead and see that interest rates are hitting new lows, that inflation is still modest, and that the earnings outlook is still positive. I think that will get us back to 9300-9400 by the end of the year.

How does Asia fit into the picture?

So far this year, Asia's been a boon to the market. Many industries have benefited from the low-priced goods that have come in from Asia and from the low inflation that's resulted from the strong dollar.

Do the prices of Internet stocks say anything about the market?

Sure. As you move into the more mature phase of a bull market and the large-cap health-care and technology issues do well, investors shift into smaller, more volatile stocks. In the case of the Internet issues, the strength in the bellwether technology companies has been accompanied by weakness in the mid-cap semiconductor and semiconductor equipment companies, so some investors have simply rotated into the longer-term story stocks.

Your focus list contains 21 names. Is there any magic to that number?

We try to keep the list between 18 and 25. That gives us the ability to focus and not overdiversify. In tough markets, we can reduce the number.

If diversification is your goal, why are nine of your 21 names in the financial area?

Because industry earnings should benefit from the drop in interest rates we've already seen and should continue to see the rest of the year. On top of that, financial stocks are cheap. Given our expectations for rates and economic growth, I think they'll perform very well.

Is that why you recently added Citicorp?

Most money-center banks got clobbered a while back over concerns about Asia. When the valuation on Citicorp came down, we were able to take advantage of the selling and buy into a major multinational financial institution that wasn't just banking anymore. Now--thanks to Travelers--it's into insurance and a variety of other products that add up to a worldwide growth industry.

By valuation, I assume you're talking about the fact that Citicorp sells at 16 to 17 times estimated 1998 earnings. That being the case, why are GE, Cisco, Wal-Mart, and Pfizer--all of which are selling at 30 to 50 times 1998 estimates--on your list?

Citicorp and a number of other financials--Banc One, for example, which is merging with First Chicago, and Allstate in the property-casualty area--sell at very low multiples, and that's part of their attraction. But at the same time, we're betting that the consistent growth companies--the ones that aren't highly dependent on the economy--will perform better in the second half of the year as the economy becomes tougher.

Cisco, which sells at better than 40 times earnings, is a networking company whose fundamentals are really quite different from many of the more commodity-based technology firms. Cisco is in an industry that's growing, and it's a company that's taking share in a growing worldwide market. We think you're going to see more 30-plus multiples on companies like this because people will be willing to pay for dependable growers. That's why we like Pfizer at 50 times earnings and Schering-Plough at a 40 multiple.

We know all about Viagra. What's the Schering story?

Schering-Plough is a consistent, high-growth drug company that has a broad portfolio of market-leading products. Claritin is the No. 1 name in nonsedating allergy products. Intron A has hepatitis C and cancer indications. Schering's R&D pipeline is filled with drugs for allergies, asthma, psoriasis, angina, diabetes, and male erectile dysfunction, to name a few. The company has a record of timely rollouts of new products.

Tell me about Wal-Mart.

Wal-Mart is one of the world's largest and most efficient retailers. It operates 1,900 discount stores, 470 supercenters, and 440 Sam's wholesale clubs in the U.S. It has another 600 outlets abroad, which suggests that international growth is still an opportunity. Wal-Mart is one of the most predictable and consistent performers among companies its size, and it's hitting on all cylinders at the moment. We see core earnings growing 12% to 13% a year, and the potential is there for 14% to 15% as its free cash flow is used to buy back shares.

Phillips and Texaco were recently bumped from your list. How come?

They're the kind of large-cap, well-known names that investors will want to own long term, but the weakness in crude oil prices suggests that earnings growth will be substandard for a while. We concluded that the stocks would be just market performers over the next year.

Yet two drillers are on your list.

Right. R&B Falcon, formed recently by the merger of Reading & Bates and Falcon Drilling, is the world's largest player in offshore drilling, and Transocean Offshore owns 40% of the world's deep-water semisubmersibles. Both are selling at less than 20 times estimated 1998 earnings, and day rates on drilling rigs continue to rise. We see these as outstanding growth stocks that are available at discounted multiples.

Which brings us to GE, which sells at 30 times estimated earnings.

We put General Electric in our capital goods sector, but it really performs more like a consumer nondurable because of its industrial diversification. It's got everything a blue chip should have: consistent earnings growth, an outstanding balance sheet, free cash flow, a global presence, and a great management team.

Doesn't the fact that every institution in the world owns the stock bother you?

GE is one of those names that's a stabilizer or a core holding. If you're bullish about stocks, it's hard not to own GE.

Isn't that what they used to say about IBM?

Yes. And yes, the world is constantly changing--you've got to keep your eye on the ball. But we've owned GE for at least five years, and we're convinced there's more P/E expansion to come based on the solidity of its earnings.