The S&P 500, the broad index of major US corporations, has set a succession of records this summer even as unease about the valuation of US equities has grown and the end of zero interest rates comes into sight.  US shares are undoubtedly expensive – on some measures such as the Cyclically Adjusted Price-Earnings ratio, which uses a 10-year average of earnings to calculate their current valuation, they have only been more expensive a few times in the past century.  Those occasions mostly preceded steep price declines. It is also true that corporate profit margins in the US are high by historic standards and if they return to more normal levels, that would suggest profits should fall significantly which would also hit share prices.  Yet although valuations are looking stretched, this tells investors nothing about the timing of any decline. Prices can keep climbing for a long time: Alan Greenspan, the former chairman of the US Federal Reserve, mused in December 1996 about “irrational exuberance” in the US stock market.  The index carried on rising for a further three years. That rise ended in a bubble of extraordinary proportions, and although plenty of people worry that some asset classes are in bubble territory today, the US stock market doesn’t appear to be there yet.  That said, it is clear that one of the forces that has driven the long rise in US equity prices has been the willingness of companies to buy back their own shares. A lot of this buying has been funded by companies taking advantage of extremely low interest rates to issue debt and using the proceeds to buy in their own equity.  If rates start to creep up, as they might well do at some point next year in the US, the tide of corporate share buybacks might start to go out. That would start to remove one of the major supports that the US equity markets have enjoyed in recent years and could signal a turning point for share prices.  But that doesn’t imply that a crash must inevitably follow. It may just mean that the market moves sideways for a period as companies’ earnings play catch-up with punchy share valuations.  A much bigger worry would be a setback to the US recovery or a new global downturn. So far, neither is obviously upon us.  What goes up won’t necessarily come down just yet.  More from the macroeconomics of investment series:  Puffing profits: the growth of e-cigarettes >>  Are buybacks distorting US share prices? >>  What’s behind the Banco Espirito Santo bailout? >>
You can&rsquo;t keep a good market down. That at least seems to be the message that   investors should take away from the recent performance of US equities