European stocks closed at another 16-month high yesterday as a solid earnings report from chipmaker Infineon boosted tech stocks and oil majors like BP rose on expectations of tight supplies.
Companies with a high proportion of earnings made in US dollars also benefited as the currency continued its fight back against the euro, which hit a one-month low under $1.24.
However, retail stocks were under pressure and media stocks edged lower after a powerful run since the start of the year.
The FTSE Eurotop 300 index of pan-European blue chips ended 0.3 per cent higher at 992.9 points, its highest close since August 27, 2002, on a modest turnover of €2.3 billion.
The narrower DJ Euro Stoxx 50 index closed up 0.5 per cent at 2,879.9 points, an 18-month closing high and a gain of 56 per cent from the six-year low it hit last March.
"Valuations no longer look cheap because the market is up a long way off its base but the earnings outlook looks good," said Stewart Higgins, a director at fund manager Martin Currie in Edinburgh.
He said life insurers were a preferred sector as they benefit from rising equity markets while technology stocks were under-represented in his portfolio because valuations appeared stretched.
"The two clouds on the horizon are euro strength, which will cause earnings' downgrades, and/or US interest rates going up, both of which we are watching closely."
Wall Street was closed for the Martin Luther King Jr Day vacation, ahead of a busy week for earnings reports which begins on Tuesday with the likes of Johnson & Johnson, General Motors, Citigroup, 3M and Motorola.
"The early indications point to a robust (US) reporting season; 42 per cent of the pre-announcements are actually guiding earnings up, not down, and of the companies reported so far, two-thirds have surprised on the upside," Credit Suisse First Boston strategists said in a report.
"In Europe, we believe that stocks with strong earnings momentum will outperform (in contrast to much of 2003). The banks sector has the best earnings momentum across Europe and is in general not affected by the euro's strength, while loan growth in the Eurozone is picking up and valuations across the sector look undemanding."
Around Europe, London's FTSE 100 closed 0.7 per cent firmer, while Paris's CAC-40 ended up 0.5 per cent. In Zurich, the SMI rose 0.1 per cent and Frankfurt's DAX closed 0.7 per cent higher.
Energy stocks, big under-performers this year, found favour as crude oil prices held firm due to cold weather in the US and indications the OPEC cartel could tighten supply further at its next meeting.
BP rose 2.4 per cent, peer Shell gained 0.9 per cent and Italy's Eni rose 1.3 per cent.