This week in the markets: the equity bull market is four years old this week and, as third quarter earnings season kicks off with high expectations, shares are holding their gains despite the growing pressure of rising bond yields.

The MSCI World index bottomed out on 12 October 2022 at 2,368, having fallen by 27% since the previous January’s post-pandemic peak of 3,248.

That fall was safely into bear market territory, a correction triggered by rising interest rates as central banks leaned into the inflation caused by the recovery from Covid and the invasion of Ukraine.

It was a painful bear market made doubly so by the fact that bonds fell in tandem with shares as interest rates rose. The 60/40 balanced portfolio that had supported investors for 20 years or so abruptly stopped working.

But as ever, a correction paved the way for a market recovery. And the bull market since then has now reached its fourth birthday, longer than the average bull market duration of 39 months, slightly stronger than the average too with a 119% gain, compared with the 101% norm. So, a good rally but not yet an excessive one.

It’s not been an unusual bull market in length or strength, but it has been notable for its dependence on one powerful theme and the narrowness of its leadership.

The rise in stock markets has relied on the performance of the biggest US stocks and the persistence of the AI boom, which continues to underpin strong earnings growth.

But at the broader level, it has been an unexciting market. The equal-weighted S&P 500 index is up by a much more tepid 47% over the past four years. Well below average.

The dependence on the tech leaders has, if anything, grown more intense over the summer. Rising bond yields are starting to have an impact on companies with anything other than bullet-proof balance sheets as borrowing costs rise both for the businesses themselves and for their customers. US mortgage rates are sitting above 7% where they are pouring cold water on the American housing market just as much as they are over here.

With 10-year bond yields well into the danger zone above 5%, the question now is ‘how high is too high for bond yields’ from an equity market perspective. And the answer to that seems to hang on the extent to which buoyant earnings can keep the show on the road.

With the third quarter season getting started this week, the consensus estimate is for a 25% growth rate. And if the evidence of recent quarters is anything to go by that could well be an underestimate. 25% could easily turn into 30-35% by the time all the numbers are in.

And that kind of stellar growth is keeping the valuation of the market at a level where talk of a bubble feels wide of the mark. The price-earnings ratio of the market has actually fallen despite the rise in share prices because of the rise in earnings. At less than 20 times expected earnings the value of the US market is high but not extreme. And other markets around the world are considerably cheaper than this.

You could argue that valuations should be lower given the obviously unsustainable nature of an annualised growth rate in earnings above 20%. Normally, investors start to discount the end of an earnings boom well ahead of the actual peak in earnings. They stop being prepared to pay up for high earnings growth even while it is still showing up in the results announcements.

Looking at the data since the second world war, you might expect a price-earnings ratio in the low teens at today’s high level of earnings growth.

So, the question then becomes both whether valuations are too high for peak earnings and whether those earnings can be maintained. The alternative glass-half-full view is that this time things are different. It’s possible but those are dangerous words for investors.

The reason why they might be different is that high earnings growth today is not a result of a recovery from a recession, or Covid, but rather the product of a genuine technological revolution. Profit margins are much higher today than in the past. The key is whether the productivity gains of the AI boom can keep them that way.

And the answer to all those questions matters, because compare a chart of the stock market since the bottom four years ago with the same market in the four years from the mid to late 1990s and the similarities are uncanny. Most worryingly, the analogy seems to bring us to the point at which the 1990s boom turned into the early 2000s bust.

There is no reason why the analogy should continue. Every cycle is different and there are lots of reasons to think that this one will be too. But the historical parallels are not something that any investor can ignore.

Looking into the week ahead, there is plenty for investors to focus on. US inflation will be a key feature of the week’s economic announcements. It will be watched closely for hints as to whether September’s quarter point hike in interest rates will be repeated in October or December. Traders in the futures markets are pricing in just a 19% chance of a hike this month, but a hike before the end of the year is fully priced in.

Wednesday’s headline inflation reading from the Bureau of Labor Statistics is expected to hit 3.7%. up from 3.4% in August, but the core measure is expected to rise more modestly from 2.4% to 2.5%. The Iran war has kept energy prices stubbornly high, and the oil price has not been below $100 since the start of September. But enough members of the Fed’s voting panel have indicated they are not in a hurry to raise rates that a couple of months’ reprieve looks likely.

Here in the UK, GDP figures for August are the highlight. Growth is expected to be flat after strong growth in July. After growth of 0.5% in each of the first two quarters of the year, the third quarter is expected to have run at a similar level but the outlook thereafter looks more difficult as rising bond yields start to bite into the housing market and the jobs market remains fragile.

That chimes with the message from the IMF, which meets this week in Bangkok amid warnings that the global economy is facing multiple challenges that threaten its remarkable resilience so far this year.

But the real focus will be on the return of earnings season, with Wall Street banks once again kicking things off this week. It’s likely to be another bumper season for them thanks largely to the AI boom. This week’s results include JP Morgan, Goldman Sachs, and Bank of America.

The question then will be how far beyond the obvious AI beneficiaries the earnings boom can spread in an environment of higher bond yields. Earnings season always matters. But this one especially so.