Investors seems to be shrugging off good earnings reports. So the markets may go nowhere for a while.

No need to tell you that this has been a lean, frustrating year for most investors. North American stocks have gone nowhere for almost six months. True, the S&P/TSX eked out a 3.9% gain in the first half but that was because last year's momentum spilled over into January. Cheap money, increased production, booming property values, optimistic forecasts, you name it, nothing seems to spur these markets. So now the analysts are pinning their hopes on the second-quarter results, which are now hitting the Street. They have been talking up the numbers and expectations are high; far too high. We may be in for another disappointment.

What sort of earnings are people looking for? Well, it's hard to believe but according to Thomson First Call in Boston, a firm that tracks this sort of data, analysts have projected increases of almost 20% year-over-year for companies in the Standard & Poor's 500 Index. I find that mind- boggling. It's roughly three times the historical average. Certainly, the larger U.S. corporations have been turning in 20% or more comparative profit gains since the third quarter of last year but only because results in 2002 and early 2003 were so bad. Things started to improve after that and some companies are soon going to have trouble posting year-over-year growth, let alone huge gains.

My concern is that a lot of the forecasters have fallen into the trap of extending trend lines. It's easy to do. You get too close to a good company that is growing rapidly and convince yourself that the good news is going to keep coming. Judgments become clouded, especially in the volatile high-tech sector where there is little history. The analyst gets carried away and investors have their hopes raised. Common sense says that companies cannot keep growing at 20% per annum but a lot of wishful thinking starts creeping in when you have watched your stocks drift sideways for months.

The point is that we should brace ourselves for some setbacks. Many of the analysts' second-quarter targets are too high, but that is only part of the problem. Investors, disgusted by the way brokers manipulated numbers during the recent scandals, are turning to unofficial, ad hoc sources of information such as WhisperNumber.com for their earnings estimates. Here's the rub. These forecasts are even more bullish than the Street's projections. For example, Alcoa posted excellent second-quarter earnings of US46c a share, up from US26c in 2003 and in line with expectations. Reaction? The stock promptly fell more than a dollar, partly because Whisper had been looking for 52c.

I am also concerned that even if most second-quarter results meet the ambitious forecasts and we have a few pleasant surprises, markets may not respond. After all, the first-quarter numbers actually beat expectations but still failed to move the yardsticks. As a result, we had an earnings multiple compression in the first half. The S&P 500 index was selling at 28 times earnings on Jan. 1. By June 30, the p/e multiple was 21. In Canada, the S&P/TSX Composite's p/e multiple fell from 21 to 19 during the same period. Stocks represented steadily increasing values but investors were not inclined to bite. We could see a similar pattern after the second-quarter numbers are released. As a matter of fact, BMO Nesbitt Burns has just released a detailed review cautioning investors that, based on historical data, the market's sideways consolidation phase is likely to continue for another quarter or two.

So my suggestion is that we should step back at this stage and focus on how the institutional investors respond to the second-quarter earnings rather than the numbers themselves. Ignore the immediate reactions as traders, stung by those ambitious "Whisper" forecasts, bail out. Watch for sustained, unexciting buying after the results have been digested. That would signal a resumption of the bull market sooner rather than later.

At the same time, have Plan B in place. Be prepared to remain patient. For years now, the market itself has set the tone. We had the high-tech boom followed by three years of bear market losses that ended with a rebound in 2003. There was always direction and investors responded. Now we are facing something relatively new. The markets have paused and we have to pause too. Stay with your investment plan even if the next stage in the bull market has been postponed until 2005. Above all, fight the urge to try and kick-start your portfolio. This is no time to tinker. Hot tips and flavour-of-the-month ideas always seem more attractive when mainstream shares are marking time. Most of them, though, are costly mistakes. They fail to perform and then you are faced with taking a loss or sitting on money that could be better used elsewhere when the market starts moving. To paraphrase Warren Buffet, "investment inactivity can be a virtue at times like these."