Global equities have more than doubled since the lows of the global financial crisis and key US stock indexes have broken historical highs. Notwithstanding the market's predictable "fear of heights" and the likelihood of a correction, we are staying overweight on equities.
Conditions continue to favour risk asset markets:
The global economy is growing despite pockets of weakness;
Corporate earnings growth will likely sustain higher stock prices;
Valuations are still moderate;
Negative real interest rates and government bond yields and the yield gap between equities earnings and government securities favour stocks;
Continued growth in global excess liquidity;
Economic conditions are not robust enough yet for central bankers to tighten monetary conditions in developed economies; and Central bankers have committed themselves as lenders of last resort in the US, euro area and Japan, hence containing periodic bouts of fear related to the twin dysfunctions of debt and deficit in these economies.
The preoccupation with US indexes trading above historical highs is superficial. It tells us nothing about the underlying index earnings and, therefore, valuations. And it says nothing about broader economic dynamics driving the global search for yields.
That the S&P 500 has broken its historical high is not surprising. The index's adjusted operating earnings per share broke its own historical high 18 months ago. And because of this earnings growth, US equities' price-to-earnings valuations are still at the middle of its cyclical range despite prices more than doubling from early 2009.
Taking an even longer view, in January 2000 - when the S&P 500 was also trading at around the levels of today - the operating earnings per share was only about half what it is today.
In short, the market is today only paying about the same nominal price for almost double the earnings of early 2000.
Monetary conditions are also very different today compared to the earlier peaks recorded in early 2000 and late 2007 - they are more supportive of even higher valuations than during those two earlier periods.
In early 2000, the 10-year US Treasury yield peaked at 6.8 per cent and the Fed policy rate stood at 6.5 per cent. In late 2007, they were 5 per cent and 5.25 per cent respectively. These compare with only 1.85 per cent and 0.25 per cent today.
Indeed, monetary conditions continue to pressure investors out of cash and bonds. Fears of the US Federal Reserve staging an earlier-than-expected exit from quantitative easing have faded.
There is insufficient evidence of strong, self-sustaining economic growth to justify the Fed pulling back on asset purchases any time over the course of this year, much less raising its policy rate.
Unemployment at 7.7 per cent is still a long way from the Fed's 6.5 per cent condition for an end to its "exceptionally low" policy rate.
And inflation remains significantly below the 2.5 per cent that would cause the Fed concern.
Meanwhile, given programmed government spending cuts and near zero interest rates, quantitative easing remains one of very few policy tools left. Ultra-low rates and quantitative easing are likely to continue through the course of this year.
Indeed, at the global level, excess liquidity - defined as the growth of money supply in excess of economic growth - is likely to pick up again as the Bank of Japan accelerates quantitative easing and as the European Central Bank activates its Outright Monetary Transactions programme.
At some point in the growth cycle, when inflation becomes a greater concern, the cyclical uptrend in equities will end.
But we are not at that point yet.