By Jeremy Gaunt, European Investment Correspondent
LONDON, April 16 (Reuters) - Corporate earnings have been so positive during the early days of the first quarter reporting season that investors have ridden global equities to new highs and pushed volatility down sharply.
They have, however, also increased their expectations for earnings still to come, a move which may, contradictorily, set the stage for disappointments.
Recent trends on financial markets, meanwhile, remain highly vulnerable to sovereign debt risks, with the Greek crisis refusing to go away despite the European Union's rescue plan.
Changes in the investment climate in emerging markets -- from yuan revaluation to monetary policy tightening -- are also threatening to disrupt what have been some of the most popular investment trades of the past year.
Little wonder that, heading into a new week, some investors have begun predicting a short-term stock market correction.
But, for now, it is a rally.
World stocks as measured by MSCI hit a series of year-to-date highs over the past week that not only outpaced last year's high but took the benchmark index to levels last seen in September 2008, around the time that Lehman Brothers was collapsing.
Analysts such as Patrik Schoewitz of Bank of America Merrill Lynch say this is because investors have found themselves in a "Goldilocks" climate, one that is neither too hot nor too cold.
"It is a scenario where growth is strong enough to drive recovery in corporate profits but not so strong as to prompt interest rate tightening fears," he said.
SURPRISE, SURPRISE
Part of the recent equity drive has come from the U.S. earnings season, where sector bellwethers such as Intel, JPMorgan, United Parcel Service, Bank of America and General Electric have beaten expectations handily.
Thomson Reuters Proprietary Research data shows that expectations were rising even before some of these readings.
A week ago, analysts were looking for year-on-year earnings-per-share (EPS) growth in the S&P 500 of 36.6 percent. They now are looking for 38.2 percent.
But the season is barely under way. In the coming week, Apple, Microsoft, Johnson & Johnson, Amazon.com, IBM and American Express will be releasing earnings and offering outlook guidance.
It is also Europe's turn to get deeper into its season, with Philips, Nokia, L'Oreal and Peugeot up to bat.
Thomson Reuters research shows EPS growth expectations for European shares at nearly 27 percent.
All of this has translated into tumbling volatility. The CBOE Volatility Index has hit lows this month that have not been seen since the third quarter of 2007.
State Street Global Advisors, a fund firm with $1.9 trillion in assets under management, said that this climate -- peaking stocks, bottoming volatility -- is conducive to investors becoming more defensive against stocks falls.
GREECE AGAIN
One big question still facing investors, meanwhile, is the Greek debt crisis, as well as the potential for a spread of the problem.
The new wrinkle in the saga is that markets have continued to pressure Greece despite the rescue plan outlined by the European Union.
Spreads between Greek bonds and benchmark German bunds have widened and credit default swaps, the cost of insuring against default, have remained expensive.
The euro shot higher immediately after the EU agreement on April 11, but has since tumbled back almost to the pre-agreement level.
This all raises a question similar to that once asked about the zero interest rate/fiscal stimulus policies launched by authorities to combat the financial crisis: What comes next if this does not work?
"Greece is as close to activating the rescue package as one can imagine," Danske Bank said in a note.
"Given the upcoming refinancing needs during April/May -- especially the 8 billion euros ($11 billion) maturing on 19 May -- market tensions are likely to remain very high, since Greece still needs to raise around 9-10 billion euros in funding over the coming month."
Greece is due to kick off a roadshow with U.S. investors for a planned dollar bond, probably in the coming week.
Any signs that big U.S. bond firms such as PIMCO are staying away from such an offering risk triggering more spikes in the yield, spread, and CDS levels of peripheral euro zone debt. (Additional reporting by Swaha Pattanaik; Editing by Ruth Pitchford)
(To read Reuters Global Investing Blog click on http://blogs.reuters.com/globalinvesting; for the MacroScope Blog click on http://blogs.reuters.com/macroscope)