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updated 11/7/2010 3:20:59 PM ET 2010-11-07T20:20:59

If you're already confused about what drives the stock market, try mulling this one over: The major indexes have climbed back to their spring highs, while we've grown more pessimistic.

Since April, when the Standard & Poor's 500 index last pierced 1,200, Wall Street prognosticators have cut estimates for economic growth and trimmed corporate earnings projections. The chatter is darker now, too. Gone is talk of a robust "V" shaped recovery and of the Federal Reserve's exit strategy from policies designed to stimulate the economy. Now we worry whether a new dose of stimulus might not prove enough.

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Yet stocks have climbed anyway, with the S&P 500 up 10 percent this year.

"Stocks are climbing a wall of worry," says James Paulsen, chief investment strategist at Wells Capital Management.

Paulsen suggests all the worry is keeping many investors from jumping headlong into stocks. And that means if the recovery gathers steams, as he expects, these investors may start buying in earnest, propelling stocks higher. "There is still dry powder," he says.

Story: After a hectic week, markets may get quiet time

But for others, the fact that stocks are up while we're down bodes ill.

"The equity markets are running on fumes," says David Rosenberg, a famously bearish economist at money manager Gluskin Sheff. Adds Steven Ricchiuto of Mizuho Securities, "It's not reflecting fundamentals."

In other words, get out now.

One explanation for this odd misalignment of stocks and sentiment is that bond yields have fallen so far that they've become less appealing. And in investing, the best of bad alternatives attracts money. Under this theory, investors who formerly would have shunned stocks in favor of bonds are holding their noses and buying.

Whatever the reason, you can't blame Wall Street cheerleading this time.

Back in April, economists surveyed by the Associated Press predicted the economy would grow 3 percent this year. Unemployment was expected to inch down to 9.3 percent by the end of the year and to 8.4 percent by the end of 2011. Now they think economic growth will be 2.6 percent this year and won't hit 3 percent even next year. And they expect unemployment to remain close to the current rate of 9.6 percent this year and 9 percent 2011.

Major Market Indices

Earnings estimates also have come down. Analysts predict companies in the S&P 500 will post $96 per share in operating earnings in 2011 versus the $100 they guessed in April, according to Thomson Reuters.

Of course, a lot has changed since April, and not all for the worse. In the summer, investors were worried about a double-dip recession, or a second downturn. Now those fears have largely receded.

What's more, nearly 80 percent of companies that have reported second-quarter earnings have beaten analyst expectations. That follows a pattern of surprising gains in other recent quarters. All of which suggests that instead of dumping stocks because analysts have cut profit estimates, maybe we should dump the analysts.

Earnings "have been so good for so long, no one pays attention," Paulsen says. "I think the economy is re-gearing."

The Federal Reserve is less convinced. In releasing the details of its "quantitative easing" plans Wednesday, it said "the pace of recovery in output and employment continues to be slow." Translation: The recovery is shaky.

Under the Fed plan, the central bank will buy $600 billion in Treasury securities from banks to provide them cash to loan to customers. Buying so many bonds drives their prices higher and yields, which move in the opposite direction, down. Lower rates are supposed to entice people to borrow money for mortgages and other loans. One beneficial result that could feed this most curious of stock rallies: Bond investors frustrated with puny yields flee to shares, lifting those prices in turn. It may already be happening.

The Dow Jones industrial average gained 326 points this week, or 3.0 percent and reached its highest point since September 2008, just before the peak of the financial meltdown. It was the fourth weekly gain for the Dow in the past five. The S&P was up 3.6 percent for the week and the Nasdaq composite index 3.0 percent.

Higher stock prices supposedly will make us feel wealthier when we look at our 401(k) and brokerage statements and give us confidence to spend more. Under the scenario, profits at companies will rise, and they will start to hire.

The Fed is hoping for other salutary effects such as a rise in the inflation rate. That would make us less likely to hoard cash in hope of lower prices on goods later. But suffice it to say, there is an elaborate chain of cause-and-effect to get to a strong economy.

Jack Ablin, chief investment officer of Harris Private Bank, has doubts about the overall effect on the economy. But he thinks the new Fed policy at the very least will push stocks up, so he's buying. His prediction: The S&P passing 1,300 by the end of next year, up from 1,225.85 on Friday.

Gluskin Sheff's Rosenberg smells danger. The last time the Fed tried to goose the economy by forcing bond rates down it led to money rushing into housing, and we all know how that ended. He worries about a similar fate for stocks.

"Can the Fed create an asset bubble? The answer is 'Yes,'" he says. "Can it get the unemployment rate down? Can it create growth? That's a bit trickier."

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Video: CNBC: Drilling into market trends

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