One danger, he says, is that "some investors are still in denial" about the fact that the Federal Reserve will raise interest rates next year, so this prospect is not yet discounted by shares. By some standards, share valuations are high. The cyclically-adjusted price-earnings ratio on the S&P 500 - a measure complied by Yale University's Robert Shiller which compares prices to earnings in the last 10 years - is more than 50 per cent above its long-term average.
Erik Britton at Fathom Consulting adds that an escalation of tensions with Russia is a further danger. He says that a withdrawal of Russian money could tip some still-fragile European banks into serious troubles. "A significant flight of capital in a system that is already so vulnerable could trigger one or more bank failures," he warns, which might lead to another credit crunch.
In fact, it might take very little to tip the region into recession. Official figures this week showed that factory orders in Germany fell by 3.2 per cent in June to a 10-month low, mostly due to a sharp fall in orders from other euro area countries. "The industrial recovery is running out of fuel," says Carsten Brzeski at ING.
While everyone agrees that troubles in eastern Europe or the Middle East might unsettle shares, others believe that equities have a massive support - the fact that the US economy is growing well. Real GDP grew at an annualised rate of 4 per cent in the second quarter, and with factory orders rising in June and the Institute for Supply Management reporting strong growth in July, economists expect the expansion to continue. This matters because there has for years been a strong correlation between US growth and equity returns, which implies that a sustained fall in equities is unlikely, while the US economy remains healthy. "There's room for continued optimism in equity markets," says Alan Higgins at Coutts.
But stock market volatility is such that a sharp drop in share prices can never be ruled out. The average implied volatility on FTSE 100 options is now 15.1 per cent, implying that the markets believe there is around a one-in-six chance of the index falling by 300 points or more in the next month.
