US equity bulls are pricing in Nirvana

American stocks, which set the tone for world markets, are on a roll. The S&P 500 has hit an 18-month high. Yet this bullishness looks overdone, says David Rosenberg of Gluskin Sheff. The inventory cycle has boosted GDP temporarily, but the longer-term outlook isn't encouraging.

We're in for "the mother of all jobless recoveries" (see chart below). Credit and money supplies are still shrinking, and everyone's forgotten "the extent of the fiscal tightening that's going to be required".

Yet investors are pricing in 'Nirvana'. Earnings per share are expected to jump by 36% in 2010. That's a stretch, given labour costs have already been cut. The 24% rise expected next year will take overall S&P earnings per share back to the 2007 peak, only two years into the weakest post-war recovery yet. There is strong scope here for disappointment.

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However, Dylan Grice of Socit Gnrale notes that the S&P is on a cyclically-adjusted p/e (which adjusts for the economic cycle by taking an average of earnings over the last ten years) of over 20. That's around 25% above the long-term average. Heady stuff.