Six reasons why shares are at or near record levels. But is it sustainable?

August 18th 2021

6 reasons market update main image

Key Points

  • Bonds and shares often diverge – we saw this a year ago with shares rallying but bond yields staying low.
  • Shares have been boosted by strong earnings news, improved valuations, investor awareness of last years’ experience of a post lockdown bounce back, vaccines providing optimism in a more sustained reopening, some pressure for more stimulus & M&A activity.
  • While shares remain vulnerable to a correction, the trend is likely to remain up.



Despite lots of worries – around the resurgence of coronavirus driven by the Delta variant, peak growth, peak monetary and fiscal stimulus and high inflation – global and Australian shares are around record levels. So how can this be? Particularly with bond yields down sharply from their highs earlier this year. And how sustainable is it? And what are the risks?


Bond yields down

On the face of it, shares and bonds seem to be telling us a different story. Since their highs earlier this year, ten-year bond yields have fallen 0.5% in the US to 1.26%, 0.4% in Germany to -0.47% and 0.7% in Australia to 1.16%. The decline in bond yields appears to reflect several factors:


But shares have been trending up

But while it may seem perplexing, and I must admit that I have been seeing shares as vulnerable to a correction, there are good reasons behind the strength in shares:


6 reasons 1
Source: Bloomberg, AMP Capital


Similarly, in Australia. While it’s still early in the June half earnings reporting season, results so far have been stronger than expected with 79% of companies reporting earnings up on a year ago and a large return of capital to shareholders via increased or reinstated dividends and buybacks.


6 reasons 2
Source: AMP Capital



6 reasons 3
Source: Thomson Reuters, AMP Capital



6 reasons 4
Source:; AMP Capital


The US faces greater risks with some states seeing their hospital systems getting stretched to the limit but this appears to reflect their low vaccination rates. The lowest 25% of US states by vaccination are seeing 3 times the number of new cases per capita, 4 times the number of hospitalisations and 7 times the number of deaths compared to the top quartile of states by vaccination. But apart from some restrictions, there appears to be little inclination to return to lockdowns so long as vaccines continue to work.

Australia’s vaccination rate has surged to 1.6 million doses a week with 39% of the whole population having had one dose and 21% two doses. If sustained, this means that the target for 70% of the adult population to be vaccinated should be met by mid-October, 80% of the adult population by early November and 80% of the whole population – which will likely be needed – in December. If this is correct then Australia should be able to more sustainably start relaxing and then exiting lockdowns from later this year. Of course, this will likely mean even higher daily coronavirus numbers but as long as they don’t overwhelm the hospital system we should be able to live with it. (Of course, the unvaccinated will remain at high risk.)


Key risks

The key risks are that:



While shares remain at high risk of a short-term correction – potentially triggered by the above-mentioned risks – we ultimately see the rising trend continuing and bond yields trending up again once it’s clear that economic recovery will continue despite the disruption from Delta. Peak GDP and earnings are far more important than peak growth in either and both look to be a long way off given that the excesses that normally lead to peaks in both – a lack of spare capacity, a sustained rise in inflation and central banks jamming the brakes on – are still mostly absent.

A divergence between shares and bonds is not that unusual – in fact, much consternation was expressed about the same a year ago. Ultimately shares prevailed as investors looked beyond prevailing uncertainties and bond yields eventually rose. As long as the market can look beyond current uncertainties to something better, then it will.


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About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.