Irish equity market earnings could rise by as much as 40 per cent this year and next with the ISEQ index topping the 7,500 level before the end of century, a leading firm of stockbrokers has said.

Davy Stockbrokers believes there is still plenty of upside in the Irish equity market despite its strong performance in the year to date and sees the ISEQ finishing 1998 at 6,500, some 22 per cent above current levels.

The market is already up 35 per cent in the first four months of the year but Davy says it has considerable potential to appreciate further, driven by strong growth in corporate earnings on foot of a buoyant Irish economy.

"At present, the momentum in corporate earnings in the Irish market is very considerable and, in large part, reflects the benefits accruing from the exceptionally strong growth rates being recorded in the Irish economy," the broker says its latest equity market review.

It forecasts earnings growth of 17 per cent in 1998 and a further 13 per cent in 1999 or a cumulative 32 per cent in the two years. But Davy believes that given the momentum in the economy, current forecasts will turn out to be overly cautious and there is a high probability that the eventual outcome for 1999 will be at least 40 per cent above the 1997 outcome.

"Few other markets, apart from bombed out ones, offer earnings growth of this magnitude," the broker notes.

In terms of investment strategy, Davy recommends switching from banks to industrial stocks. It says that the banks have outperformed industrial shares by almost 80 per cent since the middle of 1996 but expects growth in the years ahead to be more modest than in the rest of the market.

Although the banks will continue to be major beneficiaries of the strength of the economy, margins are likely to be squeezed when interest rates fall and revenue will be lost as a result of Economic and Monetary Union (EMU).

Davy recommends CRH, Independent and Ryanair as companies which are significant beneficiaries of the economic boom and which have demonstrated the capacity to use cash generated by their domestic operations to build sizeable businesses outside of Ireland.

It also says the potential for share price appreciation in Smurfit appears to be greater than most and expects the share price to be above 300p by year-end, while second-line stocks exposed to the Irish economy should continue to outperform over the balance of 1998.