Legal & General Investment Management financial economist Andrew Clare predicts that global equity markets will make further progress this year.Clare says: “In the first quarter there is scope for increasing profits by cutting costs. Gains from then will come from increasing revenue. Companies will be able to make this jump to revenue expansion.” The economist predicts the FTSE 100 to end 2004 between 4600 and 4800 and the S&P 500 to be around 1050-1150. He forecasts higher inflation and a pick-up in commodity prices, adding that 2004 will be the best year for trade since 1999. However, inflated earnings expectations will temper gains: “Earnings estimates in the US are gradually becoming less positive at a time when the macroeconomic data is very strong. This suggests all the good news has been anticipated by the equity markets and, to move higher, they need much stronger earnings figures next year.” Clare adds that investors are more likely to be disappointed than surprised by next year’s results. He also fears they are buying too many risky assets at present: “Much of the rally in the US equity market has been in high-risk stocks. Some of these positions could come back and bite the market.” Technology stocks stand out as a danger area for Clare, and he is also bearish on the outlook for bonds. But he thinks excess capacity in the world economy will help support yields at their present levels, because firms are choosing not to invest but to build up cash reserves. “Corporate bond investors like it when companies build up cash piles, since this means firms can afford to pay the coupons,” he concludes.