IF YOU look at the headlines, geopolitical risk is at record highs, with populism and strife in Europe, a coup attempt in Turkey, a tense election in America, the threat of terrorism, and tensions in the South China Sea. Peer at a stock-price screen, however, and everything seems fine. This month the S&P 500 index of big American firms roared to a new high. Benjamin Graham, a famous investor, described America’s stockmarket as a manic depressive. But now it appears to be one of the planet’s last, incorrigible optimists.

Investors are convinced that the outlook for corporate profits has improved. For the past four quarters, earnings-per-share for the S&P 500 have been falling by about 12% compared with the prior year (see chart). That has reflected the strong dollar, which crimps the value of foreign income, together with a slump at energy and commodity firms. Coca-Cola’s global sales have risen in local-currency terms but declined in dollars; ExxonMobil’s profits have fallen by four-fifths compared with two years ago.

Yet now markets believe these problems are going away. The dollar and the oil price have stabilised and...Continue reading