Stocks march to record highs

US stocks, which tend to set the tone for world markets, hit a new record this week, as the S&P 500 index climbed above 1,900.

Meanwhile, European stocks hit a new six-year high (measured by the FTSE Eurofirst index). And Japan’s Nikkei perked up to its highest level since April. The good news pushed gold down to a three-month low, below $1,300 an ounce.

What the commentators said

The reason bulls ran rampant this week was the promise of yet more easy money, noted Dave Shellock in the Financial Times. European Central Bank (ECB) president Mario Draghi seemed to hint at looser monetary policy at the ECB’s meeting next week.

Markets also focused on the positive aspect of the European elections: Italy’s reformist government held out against the populists.

Yet this good cheer could evaporate quickly – a correction looks overdue. In the last few years, stocks haven’t been driven by profit growth but by valuations – in other words, investors have been willing to pay more for a given pound of earnings. The fundamentals need to catch up, says Stephanie Deo of UBS. Yet, first-quarter results haven’t been great.

S&P 500 chartA problem across the Western world, said Wirtschaftswoche, is that profit margins look stretched after years of cost-cutting, and sales growth won’t make up for it. While the US recovery is gaining strength, Europe’s is tepid and China and other emerging markets are slowing down.

So, earnings disappointments look inevitable, especially with overoptimistic forecasts. Profits for companies in Germany’s DAX index, for instance, are expected to jump by 20% in the first quarter of 2015.

Any escalation in Ukraine could also damage the rally, while analysts may also be underestimating the impact of the end of China’s property bubble. Throw in alarming levels of insider sales in Europe and the US, notes Wirtschaftswoche, and the rally looks ever more precarious.