What next for market?

Oil costs an arm and a leg. Interest rates form a pattern that usually anticipates a recession. The world is swimming in political instability.

The stock market is clearly paying attention to other things.

The Standard & Poor's 500 index closed above the 1,300 level for the first time since May 22, 2001, yesterday, climbing modestly to finish the day at 1,303.02. The S&P 500 has advanced by 4.3 percent so far this year, while the Dow Jones industrial average and Nasdaq composite indexes have each gained slightly less than 5 percent.

All three of the major stock market indexes have climbed between 11 percent and 14 percent since the economy and the market shrugged off the post-Katrina oil shock in October.

How can stocks do so well when there seem to be so many things to worry about? A pile of factors boil down to this: The US economy is performing better than most investors expected, and prospects for recession now seem more remote. That economy continues to drive company profits higher and make stocks more attractive.

''There was concern the economy was about to roll over, but there's no real sign of a slowdown," says John Carey, manager of the $7.4 billion Pioneer Fund. ''The discounting of the next recession is further off in the horizon."

That economy helped boost profits among the S&P 500 companies by 14.5 percent during the last quarter of 2005, according to First Call Corp. Earnings growth is expected to slow down but not go away this year.

''Corporate profits in America continue to surprise and move upward," says Jim Swanson, chief investment strategist at MFS Investment Management in Boston. ''It seems to be happening again this quarter."

Other, more technical factors have played smaller parts in pushing stocks higher. Merger and acquisition activity has bid up some prices, and the dollar's improving value compared to the euro has helped.

Like high energy prices, rising interest rates have done no lasting damage to the economy or stocks so far. But even optimistic market watchers agree rising interest rates will have an impact on stock prices, not by cutting into how much companies are likely to earn, but limiting what investors will be willing to pay for those profits.

Those investors are currently paying stock prices equal to roughly 15 or 16 times earnings forecast for the entire market in 2006, and that price-to-earnings ratio is unlikely to grow more aggressive while interest rates are climbing.

The optimistic case imagines corporate profits growing about 8 percent this year and stock prices being pushed higher in proportion. Dividends could push a total return for stocks a bit higher.

Of course, unexpected problems could punch holes in any upbeat forecast. The economy has handled high energy costs so far, but oil is a constant reason to worry. Much higher interest rates would make bonds more attractive at the expense of stocks. The end of the housing boom probably won't hurt too badly, but the economy has leaned heavily on the consumer for a long time. And don't forget the real, but hopelessly unpredictable, threat of terrorism.

Even if optimistic forecasts hold up, it isn't nearly so clear what kinds of stocks can take the broad market higher from here.

The long-expected rotation favoring growth stocks over value alternatives has not happened. Overall market gains since October and since the start of this year have continued to reward value investors more.

That doesn't dissuade many portfolio managers who remain convinced a shift favoring growth is close. ''I think there's still a good chance before the year's out that we have a cyclical shift back to growth," says Jim Weiss of Weiss Capital Management.

The trick is to change horses, and not fall off.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.