The last time the Nasdaq Composite, the US technology equity benchmark, surpassed the 5,000 level was in March 2000 at the height of the dot-com bubble. On Monday, the Nasdaq rose to 5,008, closing in on its record close of 5,048 and marking the latest milestone in a six-year-long bull market for equities that has set new records over the past few weeks. The benchmark S&P 500 index closed at a record high on Monday while the FTSE Eurofirst 300, the main European index, surged to a seven-year high on February 27. Japan’s main equity index stands at a 15-year high while its British equivalent reached a 16-year one on February 24. Make no mistake about it, global equity markets have been on a tear for some time now. The foundations of the rally are being persistently questioned by investors This makes the conspicuous caution and lack of enthusiasm characterising the equity rally - particularly in the United States - all the more remarkable. Often referred to as the most unloved bull market ever, the foundations of the rally are being persistently questioned by investors. This is because of the liquidity-driven drivers of equity markets since the eruption of the global financial crisis. Central banks’ ultra-accommodative monetary policies - mainly those of the US Federal Reserve but also those of the Bank of Japan and, more recently, the European Central Bank (ECB) which will launch full-blown quantitative easing (QE) later this month - have supplanted revenue growth and capital investment as the fuel for the rally. Even in the US, where the economic recovery is on much firmer ground and leading technological stocks such as Apple and Google have been enjoying robust sales and earnings growth, strong returns stem mainly from the effects of cheap money and aggressive cost-cutting. However the main misgiving on the part of many investors is the troubling disconnect between Wall Street and Main Street. While equity markets the world over are reaching new highs, the economic recovery remains patchy and is falling far short of expectations. In the case of Europe and Japan, growth is lacklustre at best, crimped by weak demand and a shortage of credit. The fear is that the underpinnings of the rally are too brittle to cope with a tightening in US monetary policy - especially if bond markets start to price in a more hawkish Fed, leading to a sudden and sharp rise in Treasury yields. Equity bulls, on the other hand, counter that the main catalyst for the rally is shifting from the US to Europe as full-blown QE gets under way and there are increasing signs that even the worst-performing economies, such as Italy and France, are beginning to recover, helped by low oil prices and a weak euro. The latest euro zone composite PMI survey, which gauges the health of the manufacturing and services sectors, reached a seven-month high in February, with a strong pick-up in growth in the services industry. Markit, the data provide that compiles the surveys, noted that the outlook had brightened for all countries. Concerns about a Greek exit – “Grexit” – from the euro zone have eased, the weaker euro should help boost exports and the commencement of QE should stimulate the economy as we move through the year. These signs of recovery are giving QE-enthused equity investors more reasons to buy into Europe. According to Markit, nearly US$20 billion has poured into euro zone-exposed exchange traded funds (ETFs) this year, nearly double the previous record for any quarter. Euro zone stocks, moreover, have risen 13 per cent this year compared with a 2.1 per cent rise in the S&P 500 and an 8 per cent increase in the Nikkei 225, Japan’s main equity index. Yet is a euro zone-led equity rally sustainable? While fears about a Grexit may have eased following last week¹s deal between Athens and its creditors on a four-month extension of Greece’s bailout programme, a euro zone break-up index compiled by Sentix, a data provider, rose from 24 per cent to 38 per cent last month. It is still unclear how Greece will pay its bills over the next four months, let alone reach a long-term agreement with its creditors to make its membership of the euro zone more secure. More importantly, the euro zone economy is hardly roaring back to life. While stock valuations may be more attractive than in the US, political, economic and policy risks abound. Indeed investors themselves remain extremely sceptical that QE will succeed in boosting inflation expectations in the euro zone - a tad worrying, to say the least, considering QE is the main reason why Europe’s equity markets are surging. Nicholas Spiro is the managing director of Spiro Sovereign Strategy