Record margins and corporate earnings have been the driving force behind the two-year sharemarket rally which has been vastly larger than the rise in earnings

Record margins and corporate earnings have been the driving force behind the two-year sharemarket rally which has been vastly larger than the rise in earnings. However, with profit margins at peak levels and now decreasing as the US economy improves and wages growth accelerates, it is clear that margins cannot carry the market higher and that the sole hope for the side therefore is an improving economy. While the global economy's recovery is more sustainable that it was in 2011/12, the gains are marginal and likely to be back-loaded in the second half of the year, so the markets may be in an extended pause which will give time for earnings to catch up to prices. At this time, there is not safety in numbers; investors need to ensure that their stock exposures are attractively priced and have robust operating models that will ideally provide increased income. (VIEW LINK)