Edmond Jackson's Stockwatch: The Big Picture

You might scroll back to the 1962 Cuban missile crisis to find a chapter in modern history as dangerous as this: President Putin seemingly resolved in a gambit to restore the former Soviet Union, amid popular Russian acclaim; revolutionary Islam in a horrifying turn with ISIS intent on tearing up 20th century Middle East borders; and the destruction of Gaza liable to widen the Arab-Israeli conflict. Meanwhile stockmarkets generally trade near record highs, content to overlook private and public debt levels at least 30% higher than in 2007. So aren't they exposed to crash?

Actually, markets are behaving rationally in the sense of being attuned to company financial health - i.e. revenue growth, not just profits possibly boosted by cost-cutting or earnings per share by buy-backs. Half-way through the second-quarter 2014 reporting season, US Global Investors (a fund management group) assert that 73% of US firms have beaten earnings expectations and 67% revenue expectations also.

The pick-up is underlined by the wider US economy enjoying 4% growth during the second quarter having contracted by 2.9% at the start of the year during a harsh winter. It affirms investors who kept faith in the US economic recovery spreading and would probably take a spike in oil prices to upset this. Mind, it also reflects years of accumulated monetary stimulus; there should indeed be something visible in the real economy since the US Federal Reserve injected a peak $85 billion (£50 billion) a month from early 2013. It still remains to be seen how US industry and consumers stand on their own feet after the Fed tapers off bond-buying this October.

Searching for disappointment

Financial media has struggled to grab attention with "disappointments" such as Amazon and United Parcel Service which guided earnings lower; but this follows from investment spending in response to services' demand. While Amazon shareholders must be weary of repeat investment cycles, the company still grew second-quarter revenue by an impressive 23% from $15.7 billion to $19.3 billion as "losses" rose from $7 million to $126 million.

Notably, UPS has seen its daily domestic package volume jump 7.4% and export shipments by 9.1% as second-quarter revenue increased 5.6% to $14.26 billion. Visa credit services injected some caution as it guided full-year forecasts lower despite an 11% rise in quarterly profit, as credit cards using Visa's payment system are so widely held. Yet its issues appear more overseas-related than in the US where July consumer confidence has reached the highest level since 2007.

Eurozone remains stagnated

If these examples are the "worst", they are not anywhere severe enough to cause a jolt - let alone a crash. Price/earnings multiples generally look full, but with interest rates set to remain very low - even with a slight tick-up within the next 12 months - sentiment towards US equities is unlikely to change while the trend in corporate health remains broadly positive. Notwithstanding financial risks in other countries - deflation in Europe, debt in China - the US stockmarket remains the most influential.

The outlook in Europe has become murkier in the last fortnight as countries galvanise a sanctions response to Russia, and tit-for-tat starts - Russia banning imports of most Polish fruit and vegetables. However, this may still prove net positive for European equities if it finally convinces the European Central Bank (ECB) to pursue quantitative easing QE.

The eurozone remains stagnated and mired in debt, with only about 1% economic growth anticipated this year and deflationary risk exacerbated by the stand-off with Russia. Given investors are attuned to how QE has bolstered financial asset prices, if "Russian risk" tips the ECB to substantially expand its balance sheet then it could help equity values in the medium term. Higher gas prices are a real risk this winter, whether or not Russia limits supplies, but is another factor increasing the chances of QE.

Political risk

Digesting UK company results I similarly find a lack of warnings capable of turning sentiment down beyond typical summertime volatility as trading volumes reduce. RBS's near doubling of first half-year profit to £2.65 billion is significant not just as a milestone on the bank’s road to recovery, but as a wider measure of the UK economy. The chief risk is becoming political with the general election approaching and a real possibility the outcome installs Ed Balls as chancellor given the prospect for UKIP to split the Conservative vote and the Lib Dems seemingly doing poorly under Nick Clegg.

Not to disregard other risks: the irony of Asian shares reaching six-and-a-half-year highs as Japan reports industrial output falling at the fastest rate since the earthquake and tsunami of March 2011. The Japanese government's aim to restore GDP to a pre-financial crisis average of 1.8% is seriously in doubt as a new sales tax causes demand to slow hence company inventories grow and production is cut back. It remains to be seen whether China can manage its way through its extent of loans either in default or close to, and admittedly the Shanghai Composite index is down over 30% in sterling terms over the last 5 years.

Barely a week passes without an analyst proclaiming equities are grossly overvalued; and the higher they go, the further they must fall. From various technical indicators to the eternal proverb "this too shall pass", all suggest a crash is coming. I should make a disclosure: it serves any commentator well to have at least one such article in the public domain from time to time. If the market slides you get instant guru status, but if it continues to rise the article will be forgotten anyway. So the risk/reward profile facing commentators/publishers makes it astute to run "crash is coming" features.

I am fairly conservative and cautious in my own outlook, and recognise markets can fall for no apparent reasons - just when things are looking bright. But even with indices in the red as I write, the evidence from second quarter US reporting implies a significantly bearish break is less likely.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.