Stocks have come a long way in a hurry. Since the Bear Stearns (NYSE: BSC - News) disaster in March, the S&P 500 and Eurofirst 300 have both gained about 12 per cent, while the S&P came within 2 per cent of regaining its level from the start of the year. A rally this long cannot merely be attributed to relief that financial Armageddon, apparently a real risk two months ago, has been avoided.

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Instead, it is down to two main factors: a rethinking on the economy, and a remarkably optimistic reading on the prospects for corporate earnings.

On the economy, a number of surveys have failed to confirm that the developed world is sinking into recession. Wednesday's Ifo survey on the German economy, which showed perceptions improving (and which sparked a sharp rally in the euro) was only the latest example.

On earnings, it seems many traders did not believe the numbers their own analysts were producing. On January 1, analysts expected S&P 500 first-quarter earnings growth of 5.7 per cent, according to Thomson Reuters. With most earnings now in, the correct figure appears to have been a fall of 17.5 per cent. And yet the mood on the Street is that earnings beat expectations.

Removing financials, skewed by their huge losses late last year, optimism for the rest of 2008 has barely budged: on January 1, analysts expected earnings growth of 17 per cent for the third quarter, and 14.9 for the fourth; those numbers have shifted incrementally to 15.3 and 14.5 per cent respectively.

This is hard to square with the still lukewarm outlook for the economy, or with the historically high profit margins with which the corporate sector entered the slowdown. But judging by the current market levels, traders seem to be working on the assumption that the analysts have these forecasts right.

john.authers@ft.com