Can the three-month rally continue?

In the three months to the end of June, the Standard & Poor's index of 500 leading shares was up an impressive 14.9%.

The improvement was powered by an end to formal hostilities in Iraq, improving corporate profitability and rock-bottom US interest rates.

The Dow Jones industrial average of 30 top stocks ended the quarter on a 12.4% gain, while the technology-heavy Nasdaq Composite index surged 20.9% over the same three-month period.

For the S&P, the gain is the best since the 20.9% leap during the last three months of 1998, well before the tech bubble began to deflate.

It was helped in part by an apparent willingness on the part of individual investors to return to the stock market.

Much of the easy money, I think, has been made already Anthony Chan, economist, Banc One Investment Advisors Is the stock rebound the real thing?

The assets held by US mutual funds - one of the main vehicles for retail investment - grew by about $17bn in the quarter, having shrunk more than $27bn during 2002.

The three-year slump which began in early 2000, following the collapse of the tech stock bubble, had put off many retail investors until now, market-watchers said.

"A lot of portfolio managers have made a lot of decent gains, and there's a vested interest for them to not see the market sell off," said Todd Clark, head of listed trading at Wells Fargo Securities in San Francisco.

Top of the curve?

The question is now whether the momentum can be sustained - or whether, as more pessimistic observers believe, the rally is more about the fear of being left behind than about solid economic and corporate fundamentals.

On the positive side, recent economic data including consumer confidence data for June that - while still falling - proved better than expected support for hopes of good things to come.

The Fed's quarter-point cut in interest rates to 1% last month is also seen as a support for further stock gains.

"This is a refreshing departure from the weak rallies we've seen in the last two years," said Bill Hummer, senior vice president at Wayne Hummer Investments in Chicago.

"This rally has substance and legs."

But others are much less sanguine, not least because US economic growth is still below par and there is little sign that the 2 million jobs lost in the past two years are going to come back any time soon.

"The gains we saw in the second quarter are probably the best gains we'll see in any given quarter this year," said Anthony Chan, economist at Banc One Investment Advisors.