FORECASTS CALL FOR SIZZLING SUMMER; WALL STREET COULD SEE HISTORIC GAINS.

Byline: Nick Olivari Bloomberg News

With the Federal Reserve's expected interest-rate increase out of the way, money managers see a summer rally and more new highs for U.S. stocks after their best week since October 1998.

``It's off to the races again,'' said Henry Cavanna, who helps oversee $320 billion at J.P. Morgan & Co. ``Everyone knew the Fed would raise rates, and the concern was they might do more - but they said the best possible thing by removing the bias'' to tighten.

Last week's increase was ``discounted,'' meaning share prices already reflected it, money managers say, but the surprise announcement that the Fed would wait for fresh evidence of accelerating inflation before raising rates again means investors will focus on earnings in coming weeks.

Cavanna sees a broad-based rally and likes chemical company Rohm and Haas Co., trash firm Waste Management Inc., drug maker Eli Lilly & Co., and financial-services companies Bank of America Corp. and Citigroup Inc.

Stocks may even have their best rally since the summer of 1989, the only time in the last decade the Standard & Poor's 500 Index gained 10 percent between Independence Day and the Labor Day weekend in September. And though the Dow Jones Industrial Averages, Nasdaq Composite Index and the S&P 500 all touched new highs this week, with ``investors willing to see improvement in forward

earnings'' Cavanna is optimistic there are more records ahead.

For the week, the Dow industrials rose 5.6 percent, closing at a record 11,139.24 on Friday after advancing six straight days. The S&P 500 jumped 5.8 percent, and the Nasdaq composite climbed 7.4 percent. The S&P 500 and Nasdaq indexes both set records Wednesday through Friday. All three indexes had their highest percentage gains in any week since the one ended Oct. 16.

The Dow average had its first three consecutive 100-point gains since August 1997 on Monday through Wednesday, and only narrowly missed four days of 100-point jumps.

U.S. equity markets were closed Monday for Independence Day.

Analysts surveyed by First Call Corp. are forecasting that profit for companies in the S&P 500 will rise 11.4 percent in the second-quarter. That would be the highest growth rate since the third quarter of 1997, when profits grew 11.8 percent.

``We are through most of the earnings-warning period, and we are moving into the actual reporting period,'' said Joseph Stocke who helps oversee $4 billion in stocks for Meridian Investment Co. in Valley Forge, Penn.

``Looks like we will come through reasonably well, with a bias on the positive surprise side for earnings,'' he said.

Some 37 companies in the S&P 500 have warned investors that profits won't measure up to their earlier projections, including Coca-Cola Co., the world's biggest beverage company; coffee retailer Starbucks Corp.; television-program provider Cnet Inc.; and Phelps Dodge Corp., the world's No. 4 copper company.

Coke said it expects sales to fall as much as 7 percent in Europe, its No. 2 market after North America. Illnesses among 250 consumers in Belgium and France forced it to suspend sales and sparked a health scare across the continent.

Thirteen companies have made positive statements on earnings.

Companies reporting earnings in the coming week include Yahoo! Inc., the No. 1 Internet search service; Alcoa Inc.; Pfizer Inc.; and General Electric Co.

Though interest-rate concerns eased this week, investors will watch each new economic release for signs of inflation just the same. While the Fed has moved to a neutral bias, some money managers aren't ruling out more rate increases this year.

``Every number is important,'' said Joseph Williams, who helps manage $9 billion at Commerce Bank in Kansas City, Mo.

``In the long term we remain negative and believe rates will move higher. With world economic growth, the U.S. economy won't slow on this one quarter-point rate'' increase, he said.