As January came to a close, rising profit forecasts boosted stock prices, with the Dow Jones Industrial Average and the Standard & Poor’s 500-stock index (S&P 500) achieving their biggest gains as companies began releasing their fourth-quarter earning reports. Earnings from Caterpillar, Honeywell and Lockheed Martin helped spur this wave of confidence. Telecommunications giants AT&T and Verizon both exceeded analysts’ expectations. This positive earnings news - coupled with reports that durable goods orders exceeded estimates - was a trigger for stock market optimism, despite dismal losses from Ford and General Motors.

Many commentators anticipate a fairly rosy picture ahead for the stock market - not a red-hot bull market, but one strong enough to generate satisfactory returns for investors. The optimists believe that the cool-off in the housing markets will put the brakes on consumer spending, which in turn will reduce inflationary pressures. They also view the slowdown in domestic product growth as a salutary sign that the Fed’s rate hikes have achieved their aim and will be ending soon. If this scenario plays out, analysts hope to see enough growth to spur job creation - modest job increases without the threat of inflation. Proponents of a continuing (more modest) bull market also note that earnings are sound and that share prices offer good value. If the balancing act between an economic slow down and job creation pans out as they hope, the bulls believe that buying equity in large, stable companies, whose sales’ increases are not tied to economic growth, will produce reasonable returns in 2006.

On the other hand, some analysts regard the market as lackluster and unlikely to show a substantial rise. They think the bull market may have run out of steam. They see imbalances in the job market, with job creation for wage earners at the lower end of the scale lagging that of higher paid, educated workers. They have concerns about the federal budget deficit, and its potential impact on economic growth, and the dwindling habit of saving among U.S. workers.

Here are some of the key factors that the expert’s feel will influence the year ahead:

The New Federal Reserve Chairman
Overall, analysts are upbeat over the choice of Ben Bernanke as the new Fed Chairman. Bernanke is believed to be open to divergent opinions and to be a strong consensus builder. He is perceived as a more scholarly individual than his predecessor and to be extremely well versed in economic history. The market responded positively to President Bush’s nomination of Bernanke from the get-go, and appears very comfortable with his appointment.

Energy Outlook
Many Wall Street gurus expect energy prices to remain in the $50-$60 bracket for several years. Times have changed since the shortages of the 1970’s. The U.S. economy is not as vulnerable to vagaries in the oil sector, and few commentators fear the onset of an oil-price induced recession. However, geopolitical considerations remain a considerable concern and a potential source of sharp price increases, but, on the upside, analysts see opportunities for companies that specialize in conservation.

International Holdings
Many stock analysts believe that U.S. investors remain underweight in foreign investments. They note that more than half the world’s equity capital is deployed outside U.S. borders, and that this figure could increase to almost 80 percent over the next couple of decades. Although the risk element in foreign investments - especially in emerging markets - is higher than U.S. markets, many commentators recommend that investors review this option with assistance from their investment and tax advisors.

Bulls and Bears might disagree on how to interpret market signs, but both camps seem to agree that the U.S. markets retained solid strength and investor confidence in 2005 despite varied challenges including the war in Iraq, oil price spikes, and the devastation of Hurricane Katrina.