Low bond yields and the hunt for dividend yield, coupled with hopes for a rebound in Australian and global growth thanks to synchronised rate cuts and the waning of trade war tensions, is fuelling the market's rise.

There's just one problem: a conspicuous lack of earnings growth among the broader universe of industrial stocks.

Macquarie expects earnings per share (EPS) growth for industrials (excluding banks and REITs) in the 2020 financial year of 0.6 per cent. That meagre offering comes after forecasts tracked down from 1.5 per cent in November and 10.2 per cent last January, according to the broker.

Macquarie expects total EPS growth of 1.7 per cent in 2020, boosted by a forecast 10.3 per cent rise in resources EPS.

With expectations of 11 per cent earnings growth for industrials in the 2021 financial year, hopes for a growth rebound need to be converted into bottom line growth.

The record-breaking run in global stocks - the MSCI All World Countries Index is up 13 per cent since October with the addition of $US10 trillion in market value - is the most visible manifestation of the renewed bullishness on global growth.


But there are plenty of other indications of investors positioning for a growth recovery.

Copper prices, which are leveraged to global industrial production, are hovering near their highest levels for eight months as gauges of Chinese factory activity move back into expansion territory.

Bond yields have bounced off the record lows plumbed amid fears the escalation of the Sino-American trade war would lead to a global recession. Recovery hopes were boosted by the 9 per cent rise in China's exports in December.

Australia's 10-year bond yield has climbed to 1.25 per cent from a low of 0.87 per cent in August.

Meanwhile, yield curves - measured as the yield difference between a 10-year bond and a two-year bond - have steepened. A steeper curve is typically related to expectations for stronger growth.

The Aussie yield curve has steepened to 43 basis points from 14 basis points in August.

Market-based indicators of inflation expectations are also rising as oil and copper have rallied off their lows. The Australian 10-year break-even rate has risen from 1.1 per cent in August to 1.43 per cent, the highest since June.


Despite these indicators of the potential trajectory of growth all heading in the right direction, there are some strategists warning investors should brace themselves for the risk the global reflation trade falls short of expectations.

HSBC rates strategist Tom Nash reckons reflation trades could disappoint.

While highlighting the boost from the Reserve Bank of Australia's three rate cuts and global reflation hopes in driving the steeper curve, he says previous curve steepenings and rising inflation expectations at the end of prior easing cycles have tended to "swiftly" reverse and end up flatter and lower than before.

Mr Nash argues credit growth has not rebounded and wonders if Australia is close to a "reflux" point where the money created through new loans is not as inflationary as it is "destroyed" by other private sector players paying off their debt.

Other arguments against the reflation trade narrative are the resilient Australian dollar and the lack of fiscal stimulus.

Investors who have bet on the reflation trade will hope history doesn't repeat and this time will be different.