Investors are upbeat but company bosses aren't

Onwards and upwards. America's S&P 500 has eclipsed the 1,000 mark for the first time in nine months. The FTSE 100 has notched up its best July in six years 8.5% and is also at a nine-month high.

Investors are looking forward to the end of the recession, but "aren't paying much attention to economic reality", says Edward Hadas on Breakingviews. The overriding theme in the US, as we noted last week, has been high profit growth through unsustainable cost-cutting, while European investors appear determined to ignore gloomy forecasts from firms.

Last week, says Hadas, Lufthansa said there was "still no sign of a recovery", while Rolls-Royce thinks it's "still difficult to see green shoots". German chemicals group BASF reckons that "a sustained upturn is not in sight".

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So bosses think "the deep recession isn't getting much shallower". The rally is thus overdone.

US valuations are 'very stretched'

A key reason to doubt that the bounce from March is the beginning of a long-term bull run is that US stocks weren't then at valuation levels typical of major bottoms, says David Rosenberg of Gluskin Sheff& Associates. They cost 13 times trailing earnings and yielded 3%.

Now valuations look "very stretched" with the S&P on 24 times trailing profits. And that figure is based on operating earnings, a lenient definition that ignores problems thought unlikely to recur. Using much stricter "as-reported" profits (what firms report on tax returns) the p/e is a breathtaking 760.