But 2004 arrives with a warning for an increasingly exuberant Wall Street: The best of the gains is over.

With stocks advancing since March on investor hopes for a strong economic recovery, the three main gauges are trading at their highest levels in nearly two years.

Stiff challenges this year, however, include the risk of rising interest rates, a widening mutual fund probe and investor overconfidence.

"The first issue is for individual investors to get their expectations in line," said Robert Froehlich, chief investment strategist for Deutsche Asset Management in Chicago. "When we started this year, no one thought anything positive was going to happen.

"Now that the Nasdaq is up 50 percent, many might believe we'll get 50 percent gains from here to eternity. But 2004 won't be as strong."

Market forecasts for the new year are certainly more modest, ranging from a flat performance to a 15 percent advance. At least one analyst believes that after a decent rise in the first half of 2004, the Dow industrials will slide back to 8,000.

Analysts cite fundamental and technical risks in 2004:

• With short-term interest rates at a 45-year low, the Federal Reserve faces increasing pressure to raise rates to stave off inflation in a recovering economy. Higher rates could dampen consumer and business spending, which are critical to a solid rebound.

• A presidential election year typically sees more modest stock gains, of about 7.3 percent, compared with a robust 16.7 percent in the third year of a presidential term, according to the Stock Trader's Almanac. Experts attribute that to political uncertainty in an election year and a "juicing" of the economy by incumbents in the third year that loses effect over time.

• Regulators continue to widen their probe into shady trading practices in the mutual fund industry. While individual investors have largely stayed put in funds, more revelations of wrongdoing might rattle confidence and spark selling.

• In general, the value of stocks is a bit high relative to companies' profits, particularly in the tech sector. Many analysts believe stocks are due for a pullback of about 10 percent or more.

"It's pretty dangerous when investor consensus gets very bullish at the same time valuations are getting stretched and risks are high," said Bernie Schaeffer, of Schaeffer's Investment Research.

Still, investors can't help feeling upbeat. Ted Kennedy, an executive for a franchising company in Ann Arbor, Mich., has increased his shares in healthcare and consumer cyclicals, which typically do well during an economic recovery.

"There is life after recession," Kennedy said. "The decline that happened during the last bear market was the most significant in my investment lifetime — I had never seen a drop this sustained. ... Now I'm more optimistic."

That attitude is in sharp contrast to how investors felt when dismal corporate profits, terrorism fears and accounting scandals sent the Dow to a five-year low and the Nasdaq and S&P indexes to six-year lows on Oct. 9, 2002.

That date marked the end of the bear market which began in 2000 — the first three-year downturn since 1941 — as investors came back in 2003, lured by rock-bottom interest rates, a $350 billion tax cut package and optimism after the war in Iraq subsided.

Analysts say the good economic news will continue in 2004, but with investors upbeat, much of the strong data already have been priced into the market. That could make stocks resistant to a significant advance and vulnerable to declines should the data unexpectedly disappoint.