London Briefing: Where next for the UK stock market? Having come a long way since the lows reached in the spring, equities have confounded the pessimists and staged a strong rally, writes Chris Johns.

The FTSE 100, for example, is currently around 1,000 points above its 2003 lows, representing a gain of around 31 per cent. Not a bad return for anyone talented enough to time a purchase at the very bottom. Over the course of the past 12 months, returns are more modest; stocks are up around 8 per cent.

The lows reached earlier in the year were an aberration and so were the super returns enjoyed by investors since then. That annual figure, 8 per cent, is actually the right sort of number to think about going forward. Stocks should rise, but relatively modestly. Of course, the gyrations that we have seen this year will occur again, they always do, but it is always important for any investor to recognise bouts of euphoria and pessimism for what they are.

Equities have recognised that the world economy is actually in quite good shape and that all those fears about a US-led further downturn have been much exaggerated. As always, the UK equity market has gone up because things elsewhere have gone up, not because of anything new happening at home.

Correlations between US, UK and European equities have never been higher, with most of the driving force coming from the US. And where UK equities go next will almost entirely be determined by the direction of the US stock market.

Equity bears argue that the US stock market is already over-valued and, even if it is not, the global financial system is going to be blown up by the borrowing of the US consumer and the fiscal profligacy of George Bush. Well, markets beg to differ and seem supremely unconcerned by any of this and are focusing solely on the "best recovery money can buy". My guess is that the market will stay focused exclusively on the bottom line - growth - and will leave all the worrying about deficits and debts to the learned commentators.

The argument about valuation is tricky, because we are only just emerging from the great valuation bubble of the late-1990s. Pessimists fear that markets are returning to their irrationally exuberant ways. Nowhere is this more obvious with the rise in global technology stocks - the sector is up nearly 50 per cent so far this year.

Some individual stocks have had even more meteoric rises. If there is a valuation problem, this is the place to look for it - at the company level - but I don't think you will find it at the market level. At around 16 times earnings, the FTSE 100 does not look either irrational or particularly exuberant.

All of the valuation discussion presupposes that we actually do know how to appraise the worth of a company or market. In her recently serialised memoirs, Barbara Cassani inadvertently gives a fantastic real world insight into how little we really know about corporate valuation.

Cassani was the chief executive of Go, the earlier creation of British Airways who had wanted to create a low-cost competitor to the likes of EasyJet and Ryanair. Go had separated from BA in a management buyout and the backers of that buyout wanted to cash in, much to Cassani's annoyance.

Her description of valuation is priceless: "Basically, for a back-of-an-envelope estimate, you take profits before depreciation, financing and leasing costs and multiply it by a magic number."

That's it, that is valuation, as done in the real world. Of course, the investment bankers who charge so much for this valuation work will say that much effort has to be devoted to the determination of that magic number. How does Cassani tell us it was done? BA was trading on eight times profits and Ryanair was then trading at 20 times. So they settled on a magic number of 12. Believe it or not, somebody was probably paid millions for that piece of advice.

The moral of the story is don't pay too much attention to those who claim they know where the market is going because equities are obviously expensive or cheap. Our valuation methods are much too fuzzy to allow much precision. Equities usually go up, given enough time. That's about as precise as we can be.