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That swooshing sound you hear is markets zooming upward.

Over the past few days, many of the world’s leading stock market indexes – the S&P 500, the Nasdaq Composite, the Stoxx Europe 600 and the Nikkei 225 – have hit record highs. So has bitcoin. So has gold.

But, um, why? At the risk of sounding rude, the underlying data don’t seem to be quite as cheery as the current bull market in nearly everything would suggest.

Corporations are reporting decent but not overwhelming earnings growth. Interest rates remain at punishing levels in Canada, the United States and Europe.

Thanks in large part to those painfully high interest rates, the global economy is sputtering. Britain and Japan are already in recession. Germany is likely to join them, according to the Bundesbank. Meanwhile, China is grappling with a property crisis.

The U.S. economy remains a bright spot, but looking at the big picture, “global growth is projected to slow for the third year in a row – from 2.6 per cent last year to 2.4 per cent in 2024,” according to a recent World Bank report.

This is not the most natural launch pad for widespread gains in asset prices. So what is driving the recent advances?

In the case of bitcoin, the catalyst is obvious. U.S. regulators decided in January to allow exchange-traded funds to hold the digital tokens. The decision reignited interest in cryptocurrency, an asset class that had been hammered over the preceding year by the not-so-surprising revelation that some of its leading lights were crooks. Bitcoin prices took off as soon as the regulatory decision was announced.

In other areas, the reasons for soaring prices are more subtle. Gold, for instance, appears to be the unexpected beneficiary of the steep fall in Chinese property prices. Traders say the carnage in home prices has prompted many Chinese consumers to turn to bullion as a refuge for their savings.

More generally, an improving outlook for interest rates may be cheering investors around the globe. Inflation has faded over the past year, and most economists expect central banks to start chopping interest rates at some point later this year. Everything else being equal, falling rates would boost the value of just about everything – stocks and bonds as well as gold and bitcoin.

However, it’s difficult to pin the recent market euphoria on expectations of lower rates. If anything, events seem to be moving in the opposite direction: Stock markets are hitting record highs just as central bankers are talking tough about interest rates and futures markets are dialling back their hopes for early rate cuts.

One theory is that investors are eager to buy shares because they’re excited – perhaps overexcited – about the potential of artificial intelligence to reshape the economy.

Goldman Sachs analysts argue that AI has the potential to boost global economic output by 10 per cent or more over the decade ahead. Shares of Nvidia Corp., maker of AI chips, have more than tripled in value over the past year as investors bet on mass adoption of the technology.

The hope, as Wall Street Journal columnist James Mackintosh wrote this week, is that AI and other new technologies “will lead to a sustained productivity boom akin to that in the 1960s or late 1990s.”

Maybe that will happen. The problem for cautious investors is that high expectations are already embedded in share prices.

The S&P 500, the world’s most widely watched stock market index, is now trading for around 21 times its expected earnings over the next 12 months. Ignoring the weird pandemic years, this is an unusually high valuation. Over the past 20 years, it has more typically traded for around 17 times earnings.

To be fair, the current level doesn’t feel like a bubble, where share prices lose all connection to rationality. It seems more like a frothy, optimistic market determined to look on the bright side of things.

The market’s optimism may be rewarded if productivity booms as hoped. However, the ambitious price on the S&P 500 suggests investors should be braced for turbulence ahead if reality disappoints expectations.

Some of that turbulence is already apparent if you look at the market’s seven favourite stocks.

The Magnificent Seven – Alphabet Inc. GOOG-Q, Amazon.com Inc. AMZN-Q, Apple Inc. AAPL-Q, Meta Platforms Inc. META-Q, Microsoft Corp. MSFT-Q, Nvidia Corp. NVDA-Q and Tesla Inc. TSLA-Q – have churned out massive returns in recent years. But two of them – Apple and Tesla – are now trading well below their levels at the start of the year.

Is this weakness at the top a reason for worry? Perhaps not. Dirk Willer, a Citigroup strategist, says the end of the dotcom bubble in 2000 was signalled by more widespread problems. “Only when four of the large caps in tech fell below their 200-day moving average was it a conclusive sign the bull market was over,” he wrote this week.

That is reassuring. Nervous investors, though, may want to keep a close eye on the diverging course of the Magnificent Seven as this unusual bull market moves forward.

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