Mary-Chris Gay, manager of the Legg Mason US Equity fund, says that the US is still in the early stages of a profits recovery and that US earnings will come in higher than expected in 2004.Gay says: “Valuations are about the same as last year, according to the multiples. People don’t know until they see it with retrospect, but numbers tend to come in stronger than expected. It has been an excellent year for equities and production numbers continue to be strong. We anticipate earnings growth of around 10-15% and GDP growth of around 4%.” Gay (pictured) is also encouraged by the pick-up in capital spending. She says the evidence suggests that unemployment is not a problem, which should mean a good year for markets: “The market is up two-thirds of the time, so the fact that it fell for three years in a row is very unusual. It has happened only three times in the last century. But it has been heavily imprinted on people’s minds.” There is still a lot of scepticism in the market, according to Gay. She says: “People are wondering if the recovery is real, if it is sustainable. This is why I believe it is only in the early stages. It is a long way from any kind of euphoria.” Holdings in the US Equity fund remain similar to last year as Gay tends to take a three to five-year view on stocks. Among the best performers in the portfolio last year were high-beta stocks that had been under pressure, including Tyco, Qwest, Kodak and Nextel. In response to the slowing consumer, the fund has no direct exposure to conventional retailers. However, the fund still has exposure to Amazon and eBay, which Gay believes offers “compelling” value. She continues to avoid pharmaceutical stocks because they do not invest above the cost of capital. The fund is modelled on the giant Legg Mason Value trust, managed by Bill Miller. According to Morningstar, the £92.5m US Equity fund outperformed the index and its peer group substantially last year. It returned 26.1%, 10.1% ahead of the average fund in the Morningstar North America Equity category and 9.7% ahead of the MSCI North America index.