Dec. 28 (Bloomberg) -- U.S. stocks headed for their first annual gain in four years as the economy and corporate profit growth accelerated, luring many investors back into equities. Latin America's markets led a global rally.

``The Federal Reserve lowered interest rates, the government spent more money and cut taxes, and earnings improved,'' said Robert Doll, president of Merrill Lynch Investment Managers, which oversees $473 billion in Plainsboro, New Jersey. ``And stocks went up.''

Technology shares paced the U.S. advance. Avaya Inc., the country's largest supplier of office-telephone equipment, showed the biggest advance in the Standard & Poor's 500 Index. Its share price almost quintupled through Friday's close. Intel Corp., the world's largest maker of semiconductors, more than doubled to lead the Dow Jones Industrial Average higher.

Benchmark indexes in Venezuela, Brazil and Argentina also more than doubled in dollar terms. They had the year's biggest gains among 59 measures that Bloomberg News tracks globally.

Shares of raw-material producers such as Inco Ltd., the world's second-largest nickel miner, and Phelps Dodge Corp., the No. 2 copper supplier, surged in the second half of the year. The group's advance helped lift Canada's benchmark S&P/TSX Composite Index by 23 percent, its first annual gain since 2000.

The Nasdaq Composite Index, which gets two-fifths of its value from computer-related companies, climbed 48 percent this year. The S&P 500 gained 25 percent, while the Dow industrials added 24 percent. Twenty-five of the 30 stocks in the Dow average rose.

Betting on Stocks

Money managers will begin next year with the biggest bets on stocks and against bonds in at least four years, a Merrill Lynch & Co. survey showed this month.

About three-fifths of the managers surveyed, who oversee about $1 trillion in assets, have more money in equities than their benchmarks suggest and a net 65 percent have less in bonds, the survey said. This bias is the greatest since Merrill Lynch began asking the question in 1999.

U.S. shares may duplicate this year's gains during 2004, said William Miller, whose Legg Mason Value Trust is set to outpace the S&P 500 for a 13th straight year.

``If earnings are up 15 percent next year -- and they could be up that much, maybe more -- and the market is up 15 percent, then the general psychology of people will be a lot less skeptical,'' Miller said in an interview this month.

Higher stock prices relative to earnings will be the result, he said. S&P 500 companies trade at an average of almost 20 times analysts' estimated earnings for the current year, as compiled by Thomson Financial. In March, the ratio was 15.

Touching Bottom

As this year started, stocks had yet to recover from a bear market in which the S&P 500 tumbled 49 percent between March 2000 and October 2002. The retreat was the biggest for any bear market since 1937-38, in the aftermath of the Great Depression.

Sally Anderson, who helps manage $2.3 billion for Kopp Investment Advisors, recalled the doubts her peers expressed in the firm's plan to stick with a focus on technology shares, which had paced the market's decline.

``There was a real feeling of `What are they doing?''' Anderson said. ``The bearish sentiment was just extraordinary a year ago.'' The firm's Kopp Emerging Growth Fund has returned 73 percent this year after losing an average of 29 percent annually for the past three years.

U.S. stocks reached 2003 lows in March, when mounting political rhetoric started persuading investors that a U.S.-led coalition would strike Iraq without the United Nations' backing and would succeed in ousting its leader, Saddam Hussein. Within weeks, the coalition's forces had succeeded.

Bouncing Back

The Fed reduced its benchmark interest rate to 1 percent, a 45-year low, in June to help spur consumer and business spending. A month earlier, President George W. Bush signed a $330 billion tax cut, the third biggest in U.S. history.

While Congress has yet to finish the budget for the fiscal year that began Oct. 1, the White House has projected the U.S. deficit will climb to $475 billion from $374 billion in the previous year.

By December, the Dow average had returned to 10,000 for the first time in 18 months and the S&P 500 had closed at its highest level in almost 19 months. The economy grew in the third quarter at an 8.2 percent annual rate, the fastest pace since 1984, and has added jobs since August.

The year closed with projections of the fastest rate of quarterly U.S. profit growth since 2000. Earnings for S&P 500 members will rise, on average, by 21.9 percent in the fourth quarter, according to analysts surveyed by Thomson Financial. Their average estimate for 2003 calls for 16.8 percent growth.

As the U.S. picked up, Latin markets soared. ``Emerging markets tend to be, if you will, options on the U.S. economy,'' said Merrill's Doll.

`Only Option'

Venezuela's Caracas General Index jumped 140 percent in dollar terms. Buying done to gain access to U.S. currency after foreign-exchange restrictions were imposed in January fueled the surge, investors said. Thirteen Venezuelan companies, including telephone carrier CA Nacional Telefonos de Venezuela, have dollar- denominated U.S. shares.

In Brazil, the benchmark Bovespa Stock Index surged 136 percent. President Luiz Inacio Lula da Silva, who took office in January, assuaged fears he would increase government spending and undermine the country's ability to pay its debts, investors said.

Argentina's Merval Index climbed 125 percent, led by Acindar Industria Argentina de Aceros SA, the country's biggest supplier of steel rods to the automotive industry. The government expects the economy to expand next year by more than 7 percent, the fastest rate in Latin America.

``The only profitable option for investors is equities,'' said Diego Guzman, who helps manage $400 million for BNP Paribas Asset Management in Buenos Aires.

Some Concern

The S&P/TSX Index's biggest gain belonged to Ivanhoe Energy Inc., a Vancouver-based oil and natural-gas producer whose shares soared sevenfold. The stock advanced as crude-oil futures climbed 25 percent from their 2003 lows, set in March.

Gold producers such as Bema Gold Inc., whose shares more than doubled, also were market leaders. Gold futures jumped as much as 18 percent, boosting the shares of companies that produce the commodities.

Computer-related companies paced the market's rise, as the S&P/TSX Information Technology Index jumped 67 percent. Shares of Research in Motion Ltd., the maker of Blackberry wireless e-mail pagers, more than quadrupled as the company added more customers than it expected.

``The U.S. will outperform us significantly'' in 2004, said Andrew Martyn, who helps manage the equivalent of $280 million at Davis-Rea Ltd. in Toronto.

At the same time, investors such as Merrill's Doll are concerned that U.S. stocks might falter as profit growth slows. S&P 500 earnings will rise next year by 12.4 percent, more than four percentage points below this year's pace, according to the average estimate of analysts in a Thomson survey.

``A tougher year is coming, probably,'' Doll said. ``We've seen economic improvement. We've gotten a much stronger stock market. OK, what's next?''

Last Updated: December 28, 2003 12:16 EST