Major merger deals, which have been a key catalyst fueling recent stock market gains, are expected to remain in the forefront of investors' minds going into 2007 as the last week of the year closes out with a dearth of data and earnings.

Flush with cash and eager to grow, companies around the world continue to woo and wed at a frenzied pace, with mergers and acquisitions hitting a record of nearly $4 trillion worldwide this year so far. That easily surpasses the previous high in 2000 of $3.4 trillion, according to the latest figures on Friday from Thomson Financial.

Buyout funds, too, are back and bigger than ever: Data provider Dealogic said the value of announced global M&A by private-equity firms and other financial sponsors so far this year hit a record at over $725 billion, as of Friday morning.

Leveraged buyout, or LBO, activity driven by private equity firms has been a feature of the stock and bond markets throughout the year because of the creation of value for equity holders. Indeed, investors still argue that many large-cap companies remain undervalued, notwithstanding the sector's recent rally.

Punctuating the buyout bonanza is the recent interest by bargain-hunting private equity firms in home improvement chain Home Depot (HD), which has a market capitalization of about $82 billion.

Awash in cash, buyout funds are preying on companies whose shares are trading below their underlying net asset values.

"What we've seen now is that given the Home Depot example, that it's not unreasonable to think that through a consortium of private equity shops a $100 billion leveraged buyout is not out of the realm in the next 12 months," said Robert P. Brown, managing director of research at Fidelity Investments in Merrimack, New Hampshire.

MONEY EVERYWHERE

Tom Sowanick, chief investment officer at Clearbrook Research, a part of Clearbrook Financial, in Princeton, New Jersey, said the M&A boom is the result of excess cash. "Investors should not think that 2007 will be a slow year for M&A activity," he said.

There could be a number of cross-border deals next year, fueled by record cash reserves and a desire for global growth, added Sowanick.

The barrage of buyouts in the United States and abroad has fueled investor confidence in world markets, sending both the Dow Jones industrials average (DJI) and the MSCI All-Country World Index (MSCIWD) to life-time highs on Wednesday.

Year-to-date, the Dow has gained 15 percent, while the MSCI All-Country World Index is up about 18 percent.

Solid earnings have also been another catalyst. Companies in the Standard & Poor's 500 index (SPX) posted their 17th consecutive quarter of double-digit earnings growth in the third quarter, according to Reuters Estimates.

"People are being able to grow their business both inside the United States by gaining market share and on a global basis," said Edward Keon, chief investment strategist at Prudential Equity Group in New York.

He added that financial markets are facing a combination of attractive valuations for stocks, lower inflation and "still pretty good earnings performance."

But on Friday, stocks dropped as concerns about slowing economic growth persisted, causing investors to sell shares of bellwether companies such as plane maker Boeing Co. (BA).

The Dow Jones industrial average (DJI) fell 78.03 points, or 0.63 percent, at 12,343.22 while the Standard & Poor's 500 Index (SPX) dropped 7.52 points, or 0.53 percent, at 1,410.78. The Nasdaq Composite Index (XIC) fell 14.67 points, or 0.61 percent, at 2,401.18.

For the week, the Dow closed down 0.8 percent, the S&P ended down 1.1 percent and the Nasdaq closed down 2.3 percent.

"I don't see any great upside here next week," said Michael Metz, chief investment strategist at Oppenheimer & Co. in New York.

"There's a general consensus we're going to have a soft landing, so I think it's a little precautionary profit-taking, and I expect more of it over the next week or so," he added.