Why such a dour outlook?
Bernstein: Earnings will be OK, but the Fed will still be raising rates. As long as the Fed continues to tighten, there is a risk of the market being down. How far down? Bernstein: It depends on how far the Fed goes. Most investors are looking for the Fed to stop at 4.5% or 4.75%. My view is they go farther because inflation expectations are beginning to heat up. If the Fed changes gears and next year begins to lower rates, then the story changes significantly. Mary, do you still see a tale of two markets? Mary Lisanti: Absolutely. Small-cap stocks are going to continue to outperform large stocks. We have margin pressures on the large companies that won’t disappear soon, so the best we get is single-digit gains in the larger stocks. We expect 23% earnings growth for the growth portion of the small-cap Russell 2000 index. Earnings growth estimates for the large-company S&P 500 is 5% to 8%. Small stocks are going to run for a number of years, but 2006 could be a very strong year. If the
