U.S. corporate profits have been surprisingly strong over the first half of the quarterly earnings season, helping stocks to fresh record highs, but rising valuations and weakening sales growth could keep markets from booking further gains in the months ahead. 

Just over three quarters of the nearly 250 S&P 500 listed companies reporting so far this season have topped earnings estimates, according to data compiled by FactSet, a figure that stis modestly ahead of the five year average of 72%. Blended earnings growth for the quarter, FactSet suggests, is likely to show that first quarter earnings will shrink 2.3% from last year, well ahead of the 3.9% contraction forecast just a few weeks ago. 

Companies are also topping Street estimates by a solid margin, according to FactSet figures, with a bottom-line beat rate of around 5.3%, again ahead of the five year average of 4.8%, thanks in part to blowout numbers from the likes of Amazon Inc. (AMZN) - Get Amazon.com, Inc. Report , Microsoft (MSFT) - Get Microsoft Corporation (MSFT) Report , Ford Motor Co. (F) - Get Ford Motor Company Report and Facebook Inc. (FB) - Get Facebook, Inc. Class A Report .

"I think everyone agrees that we are getting much better than expected Q1 earning beats after over 50 % of the market cap has announced, but with S&P positioning getting overly extended, from a pure gut instinct perspective, much to my quants chagrin, I'm getting a tad nervous," said Stephne Innes of SPI Asset Management. "We have flipped from a state where it is a stock rally no one wants to take part in, to a frenzied paced splurge where hedge funds and investors alike continue to chase markets like greyhounds to the mechanical rabbit."

Curiously, investors aren't piling into to global stocks on the back of the U.S. earnings strength, at least according to recent data from Bank of American Merrill Lynch, which tabbed $4.4 billion in equity outflows last week alone. 

That said, corporate stock buybacks, which rose by an annual 22% over the first quarter to an estimated $270 billion, as well as a dovish Federal Reserve and stronger-than-expected GDP growth of 3.2%, have lifted the S&P 500 to fresh record highs and could take the broadest measure of U.S. stocks into the 3,000-point territory over the coming weeks.

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So, what's holding back the so-called "smart money" from buying into this year's rally, which has taken the Dow to a year-to-date gain of 13.8% and the Nasdaq Composite some 22.7% since New Year's Eve?

One answer might be quality, given that revenue growth for the 250 companies reporting so far this year is only up 5.9%, largely in-line with the five year average, and the top-line beat rate for the quarter is just 0.3%. 

U.S. stocks are expensive, as well, and trading at 16.8 times their twelve month forward earnings projections, a figure the sits above both the five year and ten year average.

Bets on continued support from the Fed, in the form of dovish rate signalling, could also fade as growth and employment continue to impress and inflation readings gradually start to accelerate.

"We doubt, though, that the Fed could remain on the sidelines if GDP growth remains strong, unemployment is at 3.5% and still falling, and wage growth is approaching 4% and still rising," said Ian Shepherdson of Pantheon Macroeconomics. "Under those conditions-which are our base case-they would have to act in order to diminish the threat of higher inflation next year. Markets want to talk about the next move from the Fed being an easing; that's not happening against this backdrop."

We'll know more on that topic by Wednesday, when the Fed publishes it latest interest rate decision and updates investors on its outlook for the months ahead. We'll also have earnings and fresh near-term forecasts from tech giants Alphabet (GOOGL) - Get Alphabet Inc. Class A Report and Apple (AAPL) - Get Apple Inc. (AAPL) Report , which report today and Tuesday respectively and will go some way towards defining the sustainability of the market's year-to-date rally.

Another clue may come from the bond market, where yields have fallen on concert with soft inflation data and, paradoxically, a risk-averse bid from fixed income investors.

"This is an unusual phenomenon, currently in evidence not only in the US but across most major investment markets," said Graham Bishop, investment director at Heartwood Investment Management, the asset management arm of Handelsbanken in the U.K.  "Investor motives are often translucent at best, but we believe that the 'jaws' opening between bond yields and equities could signify bond investors sceptical about the outlook for global growth and the inflation cycle, alongside more optimistic equity investors."

"Against this backdrop, we remain cautious, maintaining our a short-duration stance in fixed income assets (less sensitive to interest rate changes) and a neutral position in equities," he cautioned.

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