(MONEY Magazine) – You've probably noticed that those who doubted the strength of our economic recovery a few months ago have lowered their voices considerably. Even skeptics who felt that the market rally, which began in March, was based more on hope than on fundamentals, have to admit that the economy is rebounding and this market recovery is real.

All signs point to an upswing. Revised second-quarter gross domestic product growth of 3.1% was much better than expected, investor optimism has recovered from its March low, and strong second-quarter earnings bode well.

I talked with two top Wall Street strategists about the outlook for the rest of the year and where to find values in the market now. Not surprisingly, both are upbeat.

Liz Ann Sonders, chief investment strategist at Charles Schwab, says that the firm went positive on equities back in mid-March. And while she thinks that the pace of gains that we saw coming off the lows in March is not likely to be sustained through year-end, Sonders says it is possible that we will see the major indexes gain another 10% by then.

THIS ONE'S FOR REAL

Sam Stovall, chief investment strategist at Standard & Poor's, is equally optimistic. "We do believe that we're in the beginning of a new bull market," he says, "and not simply a rally in a bear market." He expects the S&P to finish out the year at about 1085. "What we see is about a 23% increase for the S&P 500 [this year], which would probably equate to a similar amount for the Dow." That means the Dow could break 10,000 by year-end. Stovall says such gains may seem large, but they are in line with the historical average for the first year of a bull market.

THE HOT SECTORS

Regarding asset allocation, Stovall says that Standard & Poor's recommendation for the average investor is roughly 60% equities, 25% cash and 15% bonds. But he also points out that, should we see a pullback in stock prices in the months ahead, S&P expects investors to use some of that cash to purchase stock at more attractive levels.

According to Stovall, the cliche "a rising tide lifts all boats" definitely applies to the sectors in the S&P 500. But, he adds, "some boats get lifted a little higher than others," and "the sectors that are most economically sensitive are likely to be the winners."

Stovall notes that in the past, groups such as consumer discretionary, information technology and industrials have done the best during the early stages of recovery, whereas energy and health care have fared the worst. He also says he is somewhat surprised by the strong performance of some of the materials sectors, like gold and diversified metals. "Diversified metals and mining, which basically are your copper, nickel, lead companies, are up 36%; gold is up 29%; and aluminum is up 23%."

DON'T DIVE INTO TECH

Sonders says this market is very different from the bull market of the roaring '90s. Back then, she says, "you pretty much had to buy tech and telecom and nothing else. It was the ultimate sector-driven market. That is a dangerous kind of game to play in this environment."

However, she does think that there will be trading opportunities in just about every sector. Cyclicals, in particular, should move up "in light of the economic recovery and, maybe just as importantly, the steep yield curve." Sonders says we may see a pop in the Nasdaq, but, she warns, "I would generally be cautious when it comes to investing in tech stocks."

STOCKS TO BUY NOW

Asked to cite individual stocks that look appealing right now, Sonders mentions a number of names that are highly rated by Schwab's statistical stock-ranking system: chemical maker Rohm & Haas (ROH), which is expected to show strong earnings growth; Wal-Mart (WMT), a play on continued strong consumer spending; USA Truck (USAK), which should do well in the early part of an economic recovery; Rockwell (ROK), a solid industrial that has lagged its peers; Briggs and Stratton (BGG), which should gain from a pickup in industrial activity; and Harte-Hanks (HHS), a direct-mail firm that will benefit from an upturn in advertising.

Asked the same question, Stovall comes up with the following choices.

Comcast (CMCSA): "As a result of the AT&T Broadband...synergies, a premium [valuation] is warranted." Corinthian Colleges (COCO): "We are projecting 25%-plus revenue gains over the next several years and believe the shares are undervalued at 1.2 times this projected growth rate." D.R. Horton (DHI): "We are still bullish on the home-building sector due to strong consumer demand and relatively low interest rates." Fair Isaac (FIC): "We see continued share price appreciation due to strong revenue growth and strategic acquisition activity in the coming months." Flextronics (FLEX): "We see increasing end-market demand." Intel (INTC): "We expect the market share leader in PC processors to prosper in a cyclical industry upturn." Jacobs Engineering (JEC): "The shares are attractive due to rising revenues, a strong backlog, a continuing debt-paydown program and a below-peers P/E."

A GRADUAL RISE IN RATES

Stovall also believes that investors should have some exposure to bonds, "but probably more on the intermediate-term part of the yield curve rather than the longer term." He also points out that the yield on the 10-year bond was at about 16.5% back in 1981, but just recently was as low as 3.1%. With yields that low, Stovall says, generally there are better risk-reward opportunities in equities than in fixed income.

He believes that the interest rate on the 10-year note is likely to inch higher over the next few years. "On an annualized basis, 4.1% is what we see in 2003, 4.8% in 2004 and 5.2% in 2005; 5.3% is our number for 2006." As rates rise, the market value of existing bonds will fall. But Stovall notes that his forecast calls for "a gradual increase, so still we're looking at a 10-year note that's not going to wreak havoc."

Sonders' take on interest rates is that the 10-year Treasury may move to 5% toward the end of the year. That will come, she says, as we start to get clearer signals that the Fed will have to start raising short-term rates sometime early in 2004.

One thing Sonders isn't worried about is an artificial bubble in stock prices resulting from people shifting money rapidly from bonds to stocks. "If I [were] seeing a huge rush of money out of cash or bonds into equities," she says, "that would be a contrarian signal and a cause for concern, but you are seeing a steady pace."

BUSINESS SPENDING BOOST

Both Sonders and Stovall believe that the recent uptick in business spending is excellent news for the economy and markets. According to Sonders, increases in capital spending are already evident in certain segments of the technology industry--and tech tends to be among the first sectors to benefit from higher corporate spending. "It's the reason you've gotten positive commentary out of Intel," she says. Manufacturing, she adds, is likely to be the next beneficiary of an increase in business spending.

Stovall agrees, saying that the need to replace aging equipment will push up capital spending by about 4% this year. Moreover, he is predicting an incredible 9.5% growth in business spending next year. "Our feeling is that the economy will grow modestly," he says. "The consumer will help, but finally business spending will be the driving force."

And consumers will continue to hang in there. "The consumer is not going to be bailing out," Stovall says. "I mean, let's face it, American consumers like to consume, especially if they still have relatively low interest rates and they have a tax rebate; we're going to have the consumer helping this economy along." He sees consumer spending going up 2.9% this year, a slight dip overall from last year's 3.1% growth, but then jumping to 4.2% next year.

Investors have struggled with a stubbornly unpredictable market and economy long enough, and we've finally come out on the other side. And many market watchers agree that more good news lies ahead. I think it's safe to say that the best is yet to come.

Lou Dobbs is the anchor and managing editor of CNN's Lou Dobbs Tonight.