Although equity markets have been strong, further record nominal highs will be no cause for surprise, with the US economy proving to be resilient, the chief investment officer of Rockefeller & Co says in a note.

On April 11, the S&P 500 Index of US stocks set a closing high of 1,593.37 and has come close to that level since. Talk of record highs may have encouraged investors to wonder whether equity markets “are ahead of themselves,” given unresolved economic and policy challenges, writes David Harris in the firm’s Global Foresight publication.

However, when adjusted for inflation and compared to valuations adjusted to corporate earnings, stock prices are not quite as high as might first appear, he said.

A more serious issue is how fixed income yields, either in nominal or inflation-adjusted terms, have been in record low territory, Harris said.

“On an absolute basis, stocks still appear slightly less expensive, at 14x 2013 earnings, than historic norms of approximately 15x. This is in spite of market gains over the last 15 months that have been generated more by an expansion of PEs than by earnings growth,” Harris wrote.

He said that price-earnings ratios ahead of 2012 were around 12 times earnings. The rise in ratios to 14x has accounted for about 14 of the 20 percentage point price gain in the S&P 500 Index between the end of December last year and February 28 of this year.

In relative terms, if stocks are compared to high-yield, or “junk” bonds, it should be noted that the earnings yield on the S&P 500 Index (the reciprocal of a price-earnings forecast of 14x) is 7 per cent; this percentage for the first time since the mid-1980s exceeds the yield on a basket of junk bonds, he wrote.

“We…do not expect to be surprised if equity markets set new nominal highs. We believe the bigger risk to equity markets would be if the bond markets eclipse their recent highs (and yields set new lows). We are not expecting this and believe it would be a negative for markets as it would signal the modest economic recovery is losing steam,” Harris wrote.

Harris wrote that the US housing market is gaining ground, while the expansionary monetary and fiscal policy of the Japanese government is positive for equities and the dollar against the yen. He said that the first quarter of this year has seen equity returns match, or in some cases, exceed, Rockefeller’s forecasts. The US economy looks to be growing by between 2 and 3 per cent in 2013, he added.