(MONEY Magazine) – EARNINGS UP, HOPE DOWN

After a strong start at the beginning of the year, stocks slumped and stayed weak for most of 2004. As of mid-November, a late-year rally had pushed the S&P 500 up by about 6%. This wobbly performance is odd when you consider that corporate profits grew steadily through the year—in fact, they beat Wall Street's expectations. Of course, what investors worry about isn't the present but the future. With each new quarter, analysts projected weaker and weaker earnings growth for the year ahead.

Boeing (BA) was the top stock on the Dow as of mid-November. The firm settled government probes and benefited from defense spending. Another big winner was Apple Computer (AAPL), up 158%. MONEY, alas, called Apple overvalued in early 2004. Apple's climb had more to do with iPods than with the outlook for tech in general. Other tech titans—including Cisco (CSCO) and Intel (INTC)—languished.

A bummer for consumers and the economy. But it was good news for energy stocks, up 28% in 2004—the best performance of any sector.

Stocks jumped in early November, with the Dow up 5%. It was the fourth straight year of autumn rallies. What's going on? Here's a theory: Traders have long bought stocks in December in anticipation of a "January effect" rally. Now people are trying to buy ahead of the December speculators too, moving the time to buy earlier and earlier in the year. The lesson: It's tough to stay one step ahead of the market.

Economists and market pros agreed that 2004 would be the year of rising interest rates. Not quite. Long-term rates rose and fell, ending up mostly unchanged. Stocks that were supposed to suffer from rising rates, from utilities to dividend payers, did well. After an early sell-off, bonds rallied back to a gain.

Total return since Jan. 1, 2004

Notes: As of Nov. 4; dividend stocks as of Oct. 29. Bond returns are for the Lehman Brothers aggregate bond index. Sources: Leuthold Group, Lehman Brothers, Merrill Lynch.

It was a good year for founders to cash out, with at least 186 initial public offerings. While Google (GOOG) made the biggest headlines, it wasn't the year's best IPO performer. Two other August issues, eCost.com (ECST) and Syneron Medical (ELOS), rose higher.

Note: As of Nov. 18. Source: IPOhome.com.