Last week was mixed for the stock market, as the Dow Jones Industrial Average and the S&P 500 Index were up and the Nasdaq Composite was down. For the week, the Dow rose 0.7% to close at 10,796, theS &P climbed 0.2% to 1,205, and the Nasdaq dropped 0.5% to 2,077. With last week’s gains, the Dow and &P are now in marginally positive territory for the year, while the Nasdaq is still down.

In terms of industry groups, energy stocks have led all other sectors by a wide margin year to date, and technology and telecommunications stocks have been the worst performers. Consensus earnings estimates for energy companies continue to forecast a decline in earnings growth for the group in 2005. Curiously, however, analysts are also expecting more than 20% gains for the energy sector in the first quarter, which implies that the latter part of the year would have to be very disappointing for energy companies. We disagree with the forecast of declines as we believe that energy prices will remain stubbornly high. For the past six months, oil prices have failed to drop below $40 a barrel, hitting a high of around $55 a barrel last autumn. We do not believe that oil will drop below that $40 level any time soon.

The market has been in a reasonably broad trading range since the election last year, with the trend being slightly to the upside. The bulls continue to opine that the economic expansion and strong corporate earnings growth will continue, and that the Fed will stop raising rates. Conversely, the bears are concerned about the Fed’s campaign of raising rates, which they believe will slow the economy and, more importantly, they argue that we are near the end of the extraordinary profit growth cycle. Our view continues to be that the U.S. economy will slow this year. Real gross domestic product (GDP) grew at a rate close to 4.5% in 2004, and the consensus has GDP growth at 3.5% for 2005. We believe that the absence of aggressive monetary and fiscal stimulus and a slowdown in the consumer sector of the economy will cause growth to be slightly less than consensus expectations. Thus, we are forecasting growth to be in the 3% to 3.5% range.

In this environment, our expectation is that the financial markets are likely to muddle through the rest of 2005. The positive story for the year would be one where strong productivity growth, low inflation and positive earnings surprises continue, and the Fed holds on raising interest rates. In this scenario, stocks could have another decent year. The negative story might involve a resumption in the dollar’s decline, unwarranted tightening on the part of the Fed, a spike in oil prices, inflationary trends, or some sort of geopolitical event that could lead to lower equity prices. Our view is that the prudent course at this time is to remain relatively neutral in relation to equities and to advocate a below-average duration stance in fixed income.

Mr. Doll is president and chief investment officer of Merrill Lynch Investment Managers.