Share prices are soaring but forecasts for economic growth are down sharply. As they say in the US: "Go figure."

The past couple of weeks have seen a relentlessly gloomy set of economic data. Business confidence is on the floor on both sides of the Atlantic, employment in the US is falling sharply and today the European Commission will slash its growth forecasts for this year and next.

Normally such data would unsettle the stock markets by fuelling investor concern about the outlook for corporate profits. In this context, first-quarter results from US companies will be watched closely over the next few days.

Now, however, markets are soaring, encouraged by the progress of the US-led forces. There is a growing belief that, in the words of one New York analyst, "Saddam's days seem to be numbered".

If this proves to be the case , a huge risk factor will be removed from investors' minds, particularly as fears of soaring oil prices - the most obvious war-related danger to the global economy - have not been realised. On the contrary, oil prices have generally eased since the war began and Brent crude closed yesterday at under $25 a barrel. OPEC, which boosted production to bridge the gap left by Iraq, is to hold an emergency meeting at the end of April to consider production cuts to support prices.

Investors are betting that the end of the war will lift the terrible uncertainty that has been affecting the international economy, boosting consumer and business confidence, and lifting investment and spending.

The predictable result has been increasing share prices, a rising dollar and falls in the price of "safe havens" such as bonds and gold.

There are two reasons for caution, which suggest that further volatility may lie ahead. The first is that the war is not yet over and further difficulties will almost certainly emerge in implementing a programme to rebuild Iraq. The wider consequences for the Middle East and for the terrorist threat also remain unclear.

The second cause for caution is the string of recent data highlighting the poor state of all the major economic blocs. The main euro-zone economies are in a very poor state - Germany is expected to hardly grow at all this year - the US economy remains soft and Asia is being hit by the SARS outbreak.

The key consideration for investors is whether the end of the war will lift business and consumer confidence enough to boost the economic outlook. In this context, they must decide whether share prices have fallen enough over the past three years to reflect the risks in the outlook. The major international investment houses still have different views on this point but, clearly for now, the optimists hold sway.