Can the bull run on in 2007?

"The last thing in the world we anticipated a few short months ago was that the Dow would be up some 16% on the year, unless it was that the

S&P 500 would be up more than 14%," says Alan Abelson in Barron's, echoing MoneyWeek's own view. Yet there's no disputing it: 2006 has belonged to the bulls in almost all major equity markets. The UK's FTSE 100 index is up 10.5%, while Europe measured by the MSCI Europe index is up 13.6%. Only Japan has disappointed; the Nikkei 225 has gained 4%, and the Topix benchmark is the tenth worst-performing major index, down 0.3%.

Overall, "this has been one hell of a year", says John Plender in the FT.

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"We have seen record merger and acquisition volumes, record private equity deals [and] record low volatility Apart from the loss of risk appetite that afflicted investors in May, it has often felt like a prizes-for-all market." But can the bull run continue in 2007? Most commentators seem to think so. Every one of the 12 strategists in the Barron's end-of-year poll forecasts a rise in the Dow and S&P 500 next year. Notably, the long-bearish Francois Trahan of Bear Stearns and Richard Bernstein of Merrill Lynch have 12-month forecasts of 1,550 (up 9%) and 1,570 (up 10%) respectively. In the UK, most analysts expect decent single-digit returns: for example, Morgan Stanley is predicting 6,550 (up 5.5%), although Investec is more bullish, targeting 6,750 (up 9%).

However, there's a growing consensus that Europe will do even better. Corporate earnings there are expected to grow more strongly than the US 6% versus 5.5%, according to Morgan Stanley's forecasts. Meanwhile, a forward p/e ratio of 13.3 for the MSCI Europe remains low by historical standards, giving valuations room to expand, says Stanley Reed in BusinessWeek. As a result, "European equities are widely expected to emerge as the belle of the global equities ball again next year", says Stacy-Marie Ishmael in the FT; some analysts argue that a 20% total return is possible in 2007.

Nevertheless, there are considerable downside risks to these rosy scenarios, says Chris Brown-Humes in the FT. "The biggest reasons to worry are that equity markets are discounting continued benign credit markets [to support further takeover activity], a soft US economic landing and no geopolitical upsets. It may not turn out that way."