The earnings season in the United States is largely behind us and the outcome has been quite pleasant for the investment crowd. Going into the season, analysts' estimates were pitched low enough to be handily beaten by the actual results.Still, some folk are griping that the quality of earnings isn't all that it seems. In particular, they think that the shrinkage of shares outstanding, caused by aggressive corporate buyback programmes, gives an upward bias to earnings-per-share (EPS) growth.

It is well known that corporations have been using a lot of cash to retire stock rather than pay higher dividends or to boost capital spending. Currently, they are not showing much interest in splashing out on capex. And, a great deal hangs on what they do in this regard.

Job creation and the strength of aggregate demand depend on more business spending, in the face of a shakier consumer. But, in addition, productivity and corporate profitability are also affected by expenditure on plant and equipment.

The S&P 500 index looks fairly attractively priced, on the basis of either trailing or forward PE. However, it is not particularly cheap if one uses five-year average earnings in the denominator. As for forward EPS estimates, they are subject to considerable revision should the economy slow down more than expected.

Meanwhile, multiples are vulnerable to a revision of views about inflation and interest rates. Stocks are very long duration instruments — more so than most bonds. Shares of ongoing businesses are valued by either implicitly or explicitly discounting a long series of cash flows, way into the future.

It doesn't take a mathematician to figure out that relatively small changes in the discount rate can have a big impact on the present value of cash flows. And growth stocks are even more vulnerable to interest-rate changes because their heftier earnings are expected to occur well down the road.

With earnings reports largely out of the way, there is increasing investor focus on growth, inflation and interest rates. Well, as we all know, the Fed is currently signalling worries about inflation and isn't budging on interest rates. Inflation is above their comfort zone and the economy certainly isn't falling off a cliff.

Yes, they are also concerned about a slowdown, but right now inflationary pressures are bugging them more. As we have always said, these guys are data driven and willing to turn with the wind.

GDP growth for the first quarter was lousy, but the more recent Institute for Supply Management (ISM) data was quite perky. Pretty much all the components of the manufacturing and non-manufacturing reports were up, including employment and new orders. Of course, the prices-paid index was also quite a bit higher, which isn't so comforting if you are an inflation worrier.

All in all, they were upbeat statistics that shows the economy isn't losing steam in a hurry. But before we assume that a vigorous growth spurt is under way, we should wait for confirmation from upcoming data.

Risk appetite is still quite high with average opinion banking on a soft landing for the US economy and de-synchronised global growth. But when comfort levels are elevated there is also increased vulnerability to the occurrence of untoward events. So it would not be surprising to get further episodes of volatility if growth or inflation reports are not to the liking of the markets.

Of course, there is always the chance that totally unexpected risk events could upset all calculations. We are not forecasting any such event, because by their very nature they are hard to predict. But the probability of their occurrence is not as low as is commonly believed. Just ask noted money manager Victor Niederhoffer, who was caught with a load of short put options after 9/11. He was also clobbered during the Asian financial crisis in 1997.

His case is not exceptional. There are countless traders who are regularly mauled because their assumptions about probabilities are wrong. In other words they underestimate the probability of the occurrence of extreme events.

Econometricians and risk managers refer to this as the problem of fat-tailed probability distributions, as opposed to Gaussian thin-tailed ones. More often than not, the fat ones outnumber the thin ones. So check your assumptions and the tails before you trade.

The Chinese Year of the Pig has, thus far, proved to be very good for the local stock market. It has risen to new heights, well beyond the correction it underwent in late February. Investors are cramming into the stock market, ignoring the old Wall Street saying that "pigs are slaughtered".

Repeated warnings by the authorities do not seem to have much effect on local investors, who don't want to be left out in the fast-rising trend. Stock valuations are pretty heady but most market participants are momentum players. The bubble is reminiscent of the Nasdaq in the late nineties and Japan in the eighties.

Nobody knows when it's going to burst, as momentum can continue to push the market higher, for longer than most people expect. The reality is that investment alternatives in China, outside the stock market and real estate, aren't attractive. As we have noted previously, the authorities haven't taken much action to tighten monetary conditions. So there is still sufficient liquidity to drive a hot economy.

The latest action by the regulators is to allow banks to buy shares overseas. This is hoped to cool the stock market. But if the local market is still booming and the currency is expected to appreciate, there is not a lot of incentive to diversify outside China.

Here's the blurb.

Iraj Pouyandeh is a Strategist and Senior Portfolio Manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com