Over the last month, the FTSE 100 has risen to its highest level since December 2007 on the back of a good run of corporate earnings announcements. It is less clear that the better economic news has contributed to the rally – the equity market barely reacted to news that the economy avoided entering a triple-dip recession in the first quarter. We doubt that corporate earnings will continue to exceed investors’ expectations for long though. Indeed, we still expect corporate profits to struggle as the economic recovery remains weak and as spare capacity constrains firms’ pricing power.
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