After two years of falling markets, a year of slumping corporate profits and a day of air attacks in September, Wall Street strategists expect their errant predictions of a good year for stocks finally will come true — next year. 

A quarterly Reuters poll found the mean of 10 forecasts was 1,297 for the 2002 close of the Standard & Poor's 500 Index — about 11 percent above its close on Dec. 6. 

Yet in a sign of newfound prudence, the pundits are predicting the index will close below where it ended 2000, and 18 percent below the mean forecast they gave in January for year-end 2001 of 1,582. 

Bullish strategists believe interest-rate cuts and the projected post-Sept. 11 increase in government spending will rapidly rejuvenate the economy, boosting the market. 

``We are at the beginning of a cyclical recovery for the stock market, which will last through 2002,'' said Charlie Reinhard, senior U.S. investment strategist for Lehman Brothers. 

The United States is ``still in a high productivity, low-inflation environment,'' Reinhard said. 

``The policy response after September 11 has been very vigorous, and that will help bring about a recovery in the economy...and engender a robust rebound in earnings.'' 

Reinhard, together with Lehman chief strategist Jeff Applegate, is projecting an S&P 500 close of 1,350 for end-2002 — a 16 percent increase over the index's December 6 close at 1,167. 

The S&P 500 fell 10 percent in 2000, and after a three-year low on September 21 of 966, is down 12 percent so far this year. The poll's median forecast for end-2002 was 1,350. 

UNCERTAINTY THE NORM 

Lehman expects ``old economy'' and ``new economy'' cyclical stocks — such as purveyors of consumer discretionary and industrial goods, and information technology — to rally in anticipation of an economic recovery that should start next spring. 

Financial stocks also will prove a good buy because inflation is likely to fall in the year ahead, Reinhard said. 

Goldman Sachs chief strategist Abby Joseph Cohen likewise asserts bright prospects for stocks and the U.S. economy. 

The nadir in corporate earnings will occur in the fourth quarter, and substantial year-on-year gains will take place in the second half of 2002, boosting stocks, she wrote in a November 20 note to clients. 

Cohen projects that the S&P 500 will close in a range of 1,300 to 1,425 by year-end 2002. 

Stocks should rise because investors ``priced in an exogenous shock of tremendous uncertainty'' following September 11, UBS Warburg's Ed Kerschner told Reuters. 

Investors will come to realize that geopolitical uncertainty has historically been much the norm, except during the 1990s, so stocks ``will be repriced for the fact that uncertainty is normal,'' he said. 

He also sees a reduction in the earnings uncertainty that (has) depressed stock prices. 

Kerschner's year-end 2002 S&P 500 estimate of 1,570 is the most optimistic among the strategists polled by Reuters, as was his early 2001 estimate for year-end 2001 of 1,715. 

A FEW BEARS 

A handful of more bearish strategists — such as Banc of America's Tom McManus and J.P. Morgan's Doug Cliggott — are sounding a note of continued caution. 

They say corporate profit recovery is likely to take longer than expected, and the S&P 500 will close next year barely higher than where it is today, or even drop. 

``The consensus seems a little circular,'' McManus said. 

``We are using the rally in stocks since the low in September as support for the case that the economy is turning, and we are using an increasing confidence in the turn in the economy as support for the case to increase our equity weightings.'' 

Confidence in the rally, which has lifted the S&P 500 by 21 percent from its September low, is misplaced because stocks wouldn't have fallen as far as they did without the Sept. 11 attacks, he said. 

Profits are likely to be flat next year compared with this year, and up just modestly in the second half, because of job losses and belt tightening by consumers and businesses, said McManus, forecasting the S&P 500 will close 2002 at 1,200. 

J.P. Morgan's Doug Cliggott is even more pessimistic. 

Cliggott accurately predicted last year's S&P 500 decline, and this year has correctly called the market's direction. He believes the S&P 500 will sink to 950 — 19 percent below its current level. 

Declining business investment and increased personal saving have overwhelmed an increase in government spending during the past 12 months — with the result that corporate profits are unlikely to rebound soon, he wrote in a Dec. 3 note to clients. 

Indeed, ``zero growth in corporate profits next year (is) an optimistic outcome,'' he wrote. 

Reduced profits mean that stocks are trading at very high price-earnings levels, Cliggott asserts. As more bad earnings news is probable in February and March, the recent rally in stocks is likely to prove ephemeral. 

``This is an opportune time for investors to reduce exposure to U.S. equities,'' Cliggott told clients on Nov. 26. 

The mean year-end 2002 forecast for the Dow Jones industrial average offered by seven of the strategists polled by Reuters was 11,279. The forecasts ranged from 10,400 to 11,850.