NEW YORK (Reuters) – Stocks rising, bulls rampant are motifs you might pick if designing a coat of arms for Wall Street at the moment. But the motto should read: Caveat emptor. Yes, buyer beware.

The S&P 500, a broad measure of the market valuation of the biggest U.S. publicly traded companies, is up 20 percent from its October closing low. It keeps climbing on a mixed bag of fourth-quarter earnings, improving U.S. economic data, and easing credit conditions in Europe. It now stands at its highest level since early last August.

We have already seen what is probably the first upgrade of a target level for the index this year courtesy of Credit Suisse.

The CBOE Volatility Index, or VIX (.VIX), a measure of what investors are paying to protect themselves against the risk of losses, is at its lowest level in seven months.

So it raises the question: Is this another Jackson Hole moment for risk assets?

At the Wyoming retreat in late August 2010, Federal Reserve Chairman Ben Bernanke sparked what was the second major leg of the stock market's rally from bear market lows the year before.

Is this the start of the third?

FRIENDLIER FOOTING FOR STOCKS

For Andrew Garthwaite, the Credit Suisse analyst behind the firm's more bullish stance, there are big changes afoot that are creating a more benign environment for stocks.

First, the European Central Bank's long-term repo operations are succeeding in reducing stresses in the region's banking sector. This week, three-month dollar Libor, the cost at which European banks can borrow dollars, marked its ninth straight day of declines.

Analysts say heavy cash infusions from the European Central Bank since late last year and signs of revived willingness to lend by U.S. investors in the new year show the banking system is flush with cash.

The U.S. economy is looking stronger than thought, with notable movement in the long-dormant housing market, where sales of previously owned homes just rose to an 11-month high.

In China, the engine of global growth whose manufacturing sector has been showing worrying signs of slowing, policymakers have demonstrated willingness to make conditions easier by lowering banks' reserve requirements.

"As we approach our year-end target two weeks into January, we have to ask ourselves the following questions: What has changed? Will equities rally further?," Garthwaite said in a research note.

His answer to the second question was yes. Credit Suisse raised its year-end S&P 500 target to 1,400 from 1,340. Critically, however, the firm did not overweight equities, saying the risks of a more severe recession in Europe and a slowdown stateside were still there.

HEALTHY DOSE OF SKEPTICISM

For Nicholas Colas, chief market strategist at the ConvergEx Group in New York, the rally remains largely untested. More scary headlines from Europe or any signs that the global economy is deteriorating could spark a sharp reversal.

Heading into the weekend, Greece was closing in on an initial deal with private bondholders that would prevent it from tumbling into a chaotic default. Creditors faced to 70 percent of the loans they have given to Athens.

"It's a confidence-based rally with the overhang of several still meaningful events to come," Colas said. "It is all well and good to say that the Greek default is well understood, but we haven't gone through it."

Outside the United States, there are mixed signals from the global economy, too.

China's factory activity likely fell for a third successive month in January. The HSBC flash manufacturing purchasing managers index (PMI), the earliest indicator of China's industrial activity, stood below 50.

The Baltic Exchange's main sea freight index (.BADI), which tracks rates to ship dry commodities and can be a useful gauge of economic activity, fell to its lowest level in three years on Friday on a growing surplus of vessels and a slump in cargo demand.

That is at odds with the work of RBC technical analyst Robert Sluymer. He sees growing outperformance of industrial metal copper to the safe-haven bet of gold as well as an upturn in a basket of Asian currencies as a bullish sign for the economy.

The caution generated by the mismatches in the various data points is perhaps reflected in by U.S. interest rates.

The yield on the U.S. 10-year Treasury note has hovered at 2 percent or just below for the last month despite a brief spike in mid-December. That suggests bondholders are not eagerly embracing the improving economy thesis for the moment.

"There is still a lot of skepticism about recovery, about moving into risk assets, about a lot of things," Colas said.

"If you really wanted to believe this about incrementally economic certainty and expansion … I would have thought you'd expect to see the 10-year back over 2 percent."

EARNINGS, DATA AND THE FED

A blitz of earnings and economic indicators next week will provide an important gauge of the economy's health.

What's more, the Federal Reserve's policymakers will convene their first meeting of the year with a two-day session that starts on Tuesday. The Federal Open Market Committee, the Fed's rate-setting panel, will release its policy statement on Wednesday. No fireworks are expected, but a decision to release individual policymakers' interest-rate forecasts could alter expectations for rates on the margins.

Monday will start one of the two most hectic weeks of the earnings season. Marquee names due to report earnings on Monday include Texas Instruments Inc (TXN.O) and Halliburton Co (HAL.N), followed by Apple Inc (AAPL.O), DuPont (DD.N), Johnson & Johnson (JNJ.N), McDonald's Corp (MCD.N), Verizon Communications (VZ.N) and Yahoo! Inc (YHOO.O) – all on Tuesday.

Boeing (BA.N), ConocoPhillips (COP.N) and United Technologies (UTX.N) are set to release results on Wednesday. Thursday's earnings line-up includes 3M Co (MMM.N), AT&T Inc (T.N), Starbucks (SBUX.O) and Time Warner Cable Inc (TWC.N). On Friday, earnings are expected from Chevron Corp (CVX.N), Honeywell International (HON.N) and Procter & Gamble Co. (PG.N)

In the coming week, economic indicators to watch will include December pending home sales data, a key measure of the housing market, on Wednesday as well as the latest weekly claims for jobless benefits on Thursday. December durable goods orders and new home sales for December also will be released on Thursday.

The week will wrap up with the Commerce Department's first look at fourth-quarter U.S. gross domestic product and the final reading for January on consumer sentiment from Reuters and the University of Michigan.

In terms of companies beating expectations, fourth-quarter earnings season has not been as good as previous ones. Of the approximately 70 companies in the S&P 500 that have reported earnings so far, 60 percent have exceeded analysts' estimates, according to Thomson Reuters data.

In comparison, in the third quarter at this early point in the reporting cycle, 68 percent had beaten Wall Street's forecasts – well below the 78 percent in that category in the second quarter, Thomson Reuters data showed.

There have also been some high-profile misses on both revenue and earnings.

General Electric Co's (GE.N) fourth-quarter revenue fell short of Wall Street's expectations, with Europe's weakening economy and weak appliance sales the main culprits.

On the other hand, banks' earnings have served as a positive catalyst for the stock market so far. The sector has been one of the market's leaders despite mixed earnings, a sign that investors' worst fears did not materialize.

(Reporting By Edward Krudy; Editing by Jan Paschal.)

NEW YORK (Reuters) – Stocks rising, bulls rampant are motifs you might pick if designing a coat of arms for Wall Street at the moment. But the motto should read: Caveat emptor. Yes, buyer beware.

The S&P 500, a broad measure of the market valuation of the biggest U.S. publicly traded companies, is up 20 percent from its October closing low. It keeps climbing on a mixed bag of fourth-quarter earnings, improving U.S. economic data, and easing credit conditions in Europe. It now stands at its highest level since early last August.

We have already seen what is probably the first upgrade of a target level for the index this year courtesy of Credit Suisse.

The CBOE Volatility Index, or VIX (.VIX), a measure of what investors are paying to protect themselves against the risk of losses, is at its lowest level in seven months.

So it raises the question: Is this another Jackson Hole moment for risk assets?

At the Wyoming retreat in late August 2010, Federal Reserve Chairman Ben Bernanke sparked what was the second major leg of the stock market's rally from bear market lows the year before.

Is this the start of the third?

FRIENDLIER FOOTING FOR STOCKS

For Andrew Garthwaite, the Credit Suisse analyst behind the firm's more bullish stance, there are big changes afoot that are creating a more benign environment for stocks.

First, the European Central Bank's long-term repo operations are succeeding in reducing stresses in the region's banking sector. This week, three-month dollar Libor, the cost at which European banks can borrow dollars, marked its ninth straight day of declines.

Analysts say heavy cash infusions from the European Central Bank since late last year and signs of revived willingness to lend by U.S. investors in the new year show the banking system is flush with cash.

The U.S. economy is looking stronger than thought, with notable movement in the long-dormant housing market, where sales of previously owned homes just rose to an 11-month high.

In China, the engine of global growth whose manufacturing sector has been showing worrying signs of slowing, policymakers have demonstrated willingness to make conditions easier by lowering banks' reserve requirements.

"As we approach our year-end target two weeks into January, we have to ask ourselves the following questions: What has changed? Will equities rally further?," Garthwaite said in a research note.

His answer to the second question was yes. Credit Suisse raised its year-end S&P 500 target to 1,400 from 1,340. Critically, however, the firm did not overweight equities, saying the risks of a more severe recession in Europe and a slowdown stateside were still there.

HEALTHY DOSE OF SKEPTICISM

For Nicholas Colas, chief market strategist at the ConvergEx Group in New York, the rally remains largely untested. More scary headlines from Europe or any signs that the global economy is deteriorating could spark a sharp reversal.

Heading into the weekend, Greece was closing in on an initial deal with private bondholders that would prevent it from tumbling into a chaotic default. Creditors faced to 70 percent of the loans they have given to Athens.

"It's a confidence-based rally with the overhang of several still meaningful events to come," Colas said. "It is all well and good to say that the Greek default is well understood, but we haven't gone through it."

Outside the United States, there are mixed signals from the global economy, too.

China's factory activity likely fell for a third successive month in January. The HSBC flash manufacturing purchasing managers index (PMI), the earliest indicator of China's industrial activity, stood below 50.

The Baltic Exchange's main sea freight index (.BADI), which tracks rates to ship dry commodities and can be a useful gauge of economic activity, fell to its lowest level in three years on Friday on a growing surplus of vessels and a slump in cargo demand.

That is at odds with the work of RBC technical analyst Robert Sluymer. He sees growing outperformance of industrial metal copper to the safe-haven bet of gold as well as an upturn in a basket of Asian currencies as a bullish sign for the economy.

The caution generated by the mismatches in the various data points is perhaps reflected in by U.S. interest rates.

The yield on the U.S. 10-year Treasury note has hovered at 2 percent or just below for the last month despite a brief spike in mid-December. That suggests bondholders are not eagerly embracing the improving economy thesis for the moment.

"There is still a lot of skepticism about recovery, about moving into risk assets, about a lot of things," Colas said.

"If you really wanted to believe this about incrementally economic certainty and expansion … I would have thought you'd expect to see the 10-year back over 2 percent."

EARNINGS, DATA AND THE FED

A blitz of earnings and economic indicators next week will provide an important gauge of the economy's health.

What's more, the Federal Reserve's policymakers will convene their first meeting of the year with a two-day session that starts on Tuesday. The Federal Open Market Committee, the Fed's rate-setting panel, will release its policy statement on Wednesday. No fireworks are expected, but a decision to release individual policymakers' interest-rate forecasts could alter expectations for rates on the margins.

Monday will start one of the two most hectic weeks of the earnings season. Marquee names due to report earnings on Monday include Texas Instruments Inc (TXN.O) and Halliburton Co (HAL.N), followed by Apple Inc (AAPL.O), DuPont (DD.N), Johnson & Johnson (JNJ.N), McDonald's Corp (MCD.N), Verizon Communications (VZ.N) and Yahoo! Inc (YHOO.O) – all on Tuesday.

Boeing (BA.N), ConocoPhillips (COP.N) and United Technologies (UTX.N) are set to release results on Wednesday. Thursday's earnings line-up includes 3M Co (MMM.N), AT&T Inc (T.N), Starbucks (SBUX.O) and Time Warner Cable Inc (TWC.N). On Friday, earnings are expected from Chevron Corp (CVX.N), Honeywell International (HON.N) and Procter & Gamble Co. (PG.N)

In the coming week, economic indicators to watch will include December pending home sales data, a key measure of the housing market, on Wednesday as well as the latest weekly claims for jobless benefits on Thursday. December durable goods orders and new home sales for December also will be released on Thursday.

The week will wrap up with the Commerce Department's first look at fourth-quarter U.S. gross domestic product and the final reading for January on consumer sentiment from Reuters and the University of Michigan.

In terms of companies beating expectations, fourth-quarter earnings season has not been as good as previous ones. Of the approximately 70 companies in the S&P 500 that have reported earnings so far, 60 percent have exceeded analysts' estimates, according to Thomson Reuters data.

In comparison, in the third quarter at this early point in the reporting cycle, 68 percent had beaten Wall Street's forecasts – well below the 78 percent in that category in the second quarter, Thomson Reuters data showed.

There have also been some high-profile misses on both revenue and earnings.

General Electric Co's (GE.N) fourth-quarter revenue fell short of Wall Street's expectations, with Europe's weakening economy and weak appliance sales the main culprits.

On the other hand, banks' earnings have served as a positive catalyst for the stock market so far. The sector has been one of the market's leaders despite mixed earnings, a sign that investors' worst fears did not materialize.

(Reporting By Edward Krudy; Editing by Jan Paschal.)

NEW YORK (Reuters) – Stocks rising, bulls rampant are motifs you might pick if designing a coat of arms for Wall Street at the moment. But the motto should read: Caveat emptor. Yes, buyer beware.

The S&P 500, a broad measure of the market valuation of the biggest U.S. publicly traded companies, is up 20 percent from its October closing low. It keeps climbing on a mixed bag of fourth-quarter earnings, improving U.S. economic data, and easing credit conditions in Europe. It now stands at its highest level since early last August.

We have already seen what is probably the first upgrade of a target level for the index this year courtesy of Credit Suisse.

The CBOE Volatility Index, or VIX (.VIX), a measure of what investors are paying to protect themselves against the risk of losses, is at its lowest level in seven months.

So it raises the question: Is this another Jackson Hole moment for risk assets?

At the Wyoming retreat in late August 2010, Federal Reserve Chairman Ben Bernanke sparked what was the second major leg of the stock market's rally from bear market lows the year before.

Is this the start of the third?

FRIENDLIER FOOTING FOR STOCKS

For Andrew Garthwaite, the Credit Suisse analyst behind the firm's more bullish stance, there are big changes afoot that are creating a more benign environment for stocks.

First, the European Central Bank's long-term repo operations are succeeding in reducing stresses in the region's banking sector. This week, three-month dollar Libor, the cost at which European banks can borrow dollars, marked its ninth straight day of declines.

Analysts say heavy cash infusions from the European Central Bank since late last year and signs of revived willingness to lend by U.S. investors in the new year show the banking system is flush with cash.

The U.S. economy is looking stronger than thought, with notable movement in the long-dormant housing market, where sales of previously owned homes just rose to an 11-month high.

In China, the engine of global growth whose manufacturing sector has been showing worrying signs of slowing, policymakers have demonstrated willingness to make conditions easier by lowering banks' reserve requirements.

"As we approach our year-end target two weeks into January, we have to ask ourselves the following questions: What has changed? Will equities rally further?," Garthwaite said in a research note.

His answer to the second question was yes. Credit Suisse raised its year-end S&P 500 target to 1,400 from 1,340. Critically, however, the firm did not overweight equities, saying the risks of a more severe recession in Europe and a slowdown stateside were still there.

HEALTHY DOSE OF SKEPTICISM

For Nicholas Colas, chief market strategist at the ConvergEx Group in New York, the rally remains largely untested. More scary headlines from Europe or any signs that the global economy is deteriorating could spark a sharp reversal.

Heading into the weekend, Greece was closing in on an initial deal with private bondholders that would prevent it from tumbling into a chaotic default. Creditors faced to 70 percent of the loans they have given to Athens.

"It's a confidence-based rally with the overhang of several still meaningful events to come," Colas said. "It is all well and good to say that the Greek default is well understood, but we haven't gone through it."

Outside the United States, there are mixed signals from the global economy, too.

China's factory activity likely fell for a third successive month in January. The HSBC flash manufacturing purchasing managers index (PMI), the earliest indicator of China's industrial activity, stood below 50.

The Baltic Exchange's main sea freight index (.BADI), which tracks rates to ship dry commodities and can be a useful gauge of economic activity, fell to its lowest level in three years on Friday on a growing surplus of vessels and a slump in cargo demand.

That is at odds with the work of RBC technical analyst Robert Sluymer. He sees growing outperformance of industrial metal copper to the safe-haven bet of gold as well as an upturn in a basket of Asian currencies as a bullish sign for the economy.

The caution generated by the mismatches in the various data points is perhaps reflected in by U.S. interest rates.

The yield on the U.S. 10-year Treasury note has hovered at 2 percent or just below for the last month despite a brief spike in mid-December. That suggests bondholders are not eagerly embracing the improving economy thesis for the moment.

"There is still a lot of skepticism about recovery, about moving into risk assets, about a lot of things," Colas said.

"If you really wanted to believe this about incrementally economic certainty and expansion … I would have thought you'd expect to see the 10-year back over 2 percent."

EARNINGS, DATA AND THE FED

A blitz of earnings and economic indicators next week will provide an important gauge of the economy's health.

What's more, the Federal Reserve's policymakers will convene their first meeting of the year with a two-day session that starts on Tuesday. The Federal Open Market Committee, the Fed's rate-setting panel, will release its policy statement on Wednesday. No fireworks are expected, but a decision to release individual policymakers' interest-rate forecasts could alter expectations for rates on the margins.

Monday will start one of the two most hectic weeks of the earnings season. Marquee names due to report earnings on Monday include Texas Instruments Inc (TXN.O) and Halliburton Co (HAL.N), followed by Apple Inc (AAPL.O), DuPont (DD.N), Johnson & Johnson (JNJ.N), McDonald's Corp (MCD.N), Verizon Communications (VZ.N) and Yahoo! Inc (YHOO.O) – all on Tuesday.

Boeing (BA.N), ConocoPhillips (COP.N) and United Technologies (UTX.N) are set to release results on Wednesday. Thursday's earnings line-up includes 3M Co (MMM.N), AT&T Inc (T.N), Starbucks (SBUX.O) and Time Warner Cable Inc (TWC.N). On Friday, earnings are expected from Chevron Corp (CVX.N), Honeywell International (HON.N) and Procter & Gamble Co. (PG.N)

In the coming week, economic indicators to watch will include December pending home sales data, a key measure of the housing market, on Wednesday as well as the latest weekly claims for jobless benefits on Thursday. December durable goods orders and new home sales for December also will be released on Thursday.

The week will wrap up with the Commerce Department's first look at fourth-quarter U.S. gross domestic product and the final reading for January on consumer sentiment from Reuters and the University of Michigan.

In terms of companies beating expectations, fourth-quarter earnings season has not been as good as previous ones. Of the approximately 70 companies in the S&P 500 that have reported earnings so far, 60 percent have exceeded analysts' estimates, according to Thomson Reuters data.

In comparison, in the third quarter at this early point in the reporting cycle, 68 percent had beaten Wall Street's forecasts – well below the 78 percent in that category in the second quarter, Thomson Reuters data showed.

There have also been some high-profile misses on both revenue and earnings.

General Electric Co's (GE.N) fourth-quarter revenue fell short of Wall Street's expectations, with Europe's weakening economy and weak appliance sales the main culprits.

On the other hand, banks' earnings have served as a positive catalyst for the stock market so far. The sector has been one of the market's leaders despite mixed earnings, a sign that investors' worst fears did not materialize.

(Reporting By Edward Krudy; Editing by Jan Paschal)

NEW YORK – Two of the biggest questions on Wall Street are now settled: how power is divided in Washington and how big the Federal Reserve’s bond-buying stimulus program will be.

So what’s next? Here are predictions by a panel of experts.

• Jeffrey Kleintop, chief investment strategist, LPL Financial

The most important issue for this year and next will be the unemployment rate,” Kleintop says. “This election was about jobs.”

Kleintop predicts a rally for stocks that pay high dividends in industries like telecommunications and utilities. With large Republican gains in mid-term elections, Kleintop anticipates that the lame duck Congress will be more willing to extend the capital gains tax cuts passed during George W. Bush’s time in office rather than let them expire, as they are set to do at the end of the year. He also predicts that the dollar will continue to fall as the Fed attempts to spur spending by buying bonds.

Bottom line: He expects the stock market to return a high single digit percentage point gain over the next 12 months, in line with the 7.5 percent gain in the S&P 500 so far this year.

• Mark Vitner, chief economist, Wells Fargo

Vitner argues that the Republican takeover of the House of Representatives makes it more likely that President Obama will move toward the center and that fiscal policy will dominate the political agenda.

“There’s been all sorts of discussion about the Tea Party and what it stands for,” Vitner says. “The central message they seem to represent is that we have to find a way to live within our means.” Getting there, he says, will mean either new taxes or a series of painful spending cuts.

Vitner thinks that the stock market will do well in the first part of next year but will then hit a wall. “All of the problems that we have today will still be with us then,” he says. “In the best of all worlds we will be stuck with a very modest economic recovery with meager growth rates.”

Bottom line: No big gains for the stock market as Washington struggles to fix the nation’s balance sheet.

• Mohamed El-Erian, CEO, PIMCO

The head of global bond giant PIMCO fears gridlock in Washington won’t be as good for the markets as some investors think. In a note to clients, El-Erian wrote that gridlock only helps with “a private sector that is in good shape – businesses and households with robust balance sheets, positive cash flow and access to credit.”

That’s not the case now, he says. Corporations and wealthy households aren’t willing to spend cash on their respective balance sheets or take any risks.

For big gains in the stock market, Washington will need to find a way to clear up the debts still weighing down consumers.

Bottom line: A change in government doesn’t appear likely to solve the problems that the economy faces.

• Binky Chadha, chief U.S. equity strategist for Deutsche Bank.

Once the market believes Washington is more moderate, Chadha sees cyclical industries doing best, as they usually do as an economy begins to grow. But he also sees gains for health care, which he calls the cheapest industry in the S&P 500. Chadha says most of the gains since the summer’s lows have been due to better-than-expected economic data, not from expectations about the election or stimulus from the Federal Reserve.

That explains why he’s so bullish.

Bottom line: He thinks the S&P 500 will end 2010 at 1,275 and end 2011 at 1,550, a 22 percent jump. It closed at 1,198 on Wednesday.

• David Bianco, chief U.S. equity strategist, Bank of America Merrill Lynch

Bianco says the election results are just what investors have been looking for.

With lower threats of regulation, many analysts have pointed to financials, energy and health care as post-election winners. But Bianco says he’s not sure whether health care should be included in the group.

“Different policy decisions are vying against each other,” Bianco said. “I think it’s just as uncertain for health care as it was before.”

Bottom line: He expects the S&P 500 to rise to 1,350 in 12 months, driven by continued earnings growth.

NEW YORK – It’s a question as old as investing itself: will good performance last?

The Dow Jones industrial average and the Standard & Poor’s 500 index are both up more than 5 percent this year, and barring something dramatic will finish in the black. Much of the gains can be attributed to two sectors: companies that make equipment used in big construction projects, and hotels, restaurants and ritzy clothing stores. Each is up more than 15 percent for the year.

Some stocks in the group are up much more. Anyone who invested in engine-maker Cummins Inc. in early January watched the investment grow by 100 percent. Priceline.com Inc. has jumped about 60 percent.

Normally, performance like that would be a red flag. Chasing after past performance is an investing sin that, like dunking your potato chip twice in dip, everyone is guilty of occasionally. But some money managers say that this could be one time when it pays to keep investing in stocks that are outperforming the market.

The reasons: Much of the world is on a building binge. And consumers with good jobs are starting to spend money again.

Industrial companies are profiting from massive infrastructure spending in emerging markets such as China, Brazil and India. As each country builds roads, tunnels, schools and malls to cater to a growing middle class, they often turn to American corporations for machines, trucks and airplanes.

“The performance of the industrial sector is really a vote of confidence in our ability to export quality products around the world,” said Nick Calamos, president of investments at Calamos Asset Management Inc.

Cummins, for example, saw sales of construction equipment more than double in the second quarter, mainly because of building projects in China. Caterpillar has expanded its operations in Brazil and China this year in anticipation of continuing growth.

The weakening dollar could add additional fuel. While a falling dollar may make it more expensive for Americans to travel abroad, it’s a benefit for companies that sell products to international clients whose euros and yens can buy more dollars. “With a falling dollar, a lot of these products that these companies make are going to be cheaper for buyers overseas,” said Brian Washkowiak of Talon Asset Management.

There may be an opportunity, however slight, for increasing revenues in the United States, too. President Obama recently proposed a bill that would call for $50 billion to be spent over six years to rebuild roads, rails and airport runways in the United States, which could translate into additional dollars for the likes of Union Pacific Corp. and Deere & Co.

Industrial companies tend to have strong balance sheets, which means that they aren’t taking on a lot of debt that could hurt them should growth not be as strong as anticipated.

“These companies have been very disciplined as they grow,” said Mark Schultz, the portfolio manager of the MTB Mid-Cap Growth fund. “If homeowners would have been as disciplined as corporate America, we wouldn’t have been struggling with half of the issues that we are.”

Household balance sheets are a little murkier. High unemployment is persistent. Home prices are stagnant. And the market is still down about 20 percent from the boom days of 2007. Why, then, would anyone spend money on something as frivolous as a sweater at the Limited?

It was that argument that in the first half of 2009 pushed down so-called consumer discretionary companies — which, unlike retailers such as Wal-Mart, profit from people splurging. This year, however, many of these companies have performed well as consumers made purchases they delayed during the darkest days of the recession. Consumers are expected to spend about $465 billion this holiday season, or about 3 percent more than last year, said Eileen Hoffman, an analyst at Janus Capital Management. That would bring spending back to about the same level as the 2006 holiday season.

The recession also forced many luxury boutiques and small businesses to close, which has translated into greater market share and higher profits for the companies that were able to survive.

“What a lot of people are missing is that they shouldn’t be looking at the overall consumer spending numbers but the strong companies that have made it through,” Hoffman said. “Even if the overall spending numbers are flat, you’re going to get massive market share gains for the ones that are still here.”

You only need to go to the mall to see this in action. Macy’s is up 44 percent for the year and J.C. Penney Co. is up 27 percent. Shares of teen retailer Abercrombie and Fitch Co. are up 30 percent.

It is true that industrials and discretionary consumer stocks tend to be the first ones that show growth after a recession, which means that their strong performance this year could be seen as something as unnoteworthy as October following September. So an argument can be made that their rallies are following a historical pattern and will peak soon.

But here’s something else to consider. The industrial companies in the S&P 500 index are trading at 15.9 times their expected earnings, which is 20 percent less than the category’s average over the past 15 years, said Howard Silverblatt, the senior index analyst at Standard and Poor’s. Shares in the consumer spending segment of the index, meanwhile, are trading at 15.3 times their expected earnings, which is 34 percent less than their historical average.