Sir Martin Sorrell, chief executive of advertising empire WPP, yesterday predicted a solid pick-up in the market this year but voiced concerns that an overheating in the US could derail progress in 2005.

The combined effects of the Olympics in Athens, the European football championships in Portugal and the presidential race in the US have led analysts to forecast growth in the advertising market of 3% to 4% this year, a figure with which Sir Martin concurs.

As WPP, the world's third largest advertising group, reported better than expected annual profits, Sir Martin said: "We have been saying for about two or three years that 2004 will be a better year."

Referring back to his comment of over a year ago that the industry-wide recession resembled a bath with "deep corrugations" along the bottom, he said the industry was now out of that bath.

Staying with bathroom comparisons, he warned that the combined effects of a large US government deficit, weak dollar and rising inflation could pour cold water over this recovery.

"One of our concerns is what will happen in America after the election. Will they have to rein back spending?" he said. "We just do not want to take a shower in 2005."

His positive comments about this year follow similarly bullish remarks by market leader Omnicom which predicted strong revenue growth for this year and a stabilising European market. WPP, which owns the Young & Rubicam and J Walter Thompson agencies, yesterday announced an 18% jump in pretax profits for last year to £473m. Analysts had been predicting profits around £440m to £455m.

Revenue increased more than 5% to just over £4.1bn, buoyed by the acquisition of Cordiant. Stripping out the effect of that deal, revenues on a like-for-like basis were flat in the first half of last month and picked up only just over 1% in the past six months as the US market recovered.

Margins in the company increased from 12.3% to 13% as predicted at the time of the Cordiant deal and the company is hopeful that margins this year will be 13.8%.

Shares in the business, however, dropped 28.5p to 602p, as investors said the good news had already been factored in.