The bulls return, but for how long? It is almost as if the past year has just been a bad dream. Global equities this week re-entered a bull market, having risen 20 per cent since their October lows. The gains mean that many share indices are within touching distance of their highs from 2011, or above them. The Nasdaq index of predominantly technology stocks is at its highest level since the end of 2000. Justifications for the sharp rally are well rehearsed. Better economic data, particularly in the US but also in Europe and China, has, for now, dimmed the prospects of a global double-dip recession. And fears of a break-up of the eurozone have receded due to action from the European Central Bank. But the question all investors are asking is: just how sustainable is the rise in equities? Markets may have largely grown bored with the "Groundhog Day" nature of the Greek bail-out talks but few are complacent that Athens has stopped posing threats for investors. The news late on Thursday that Europe was demanding greater spending cuts from Greece weighed on equities on Friday, with the S&P 500 set for its first weekly decline this year. Caution also comes from the twin facts that January is historically the best month of the year as investors return to the markets with fresh optimism while the first month also proves to be good for contrarian strategies. So far, 2012 is living up to that billing. The worst-performing stock market in Europe last year - Greece - is the best performer this year. Last year's star, Ireland, is the laggard, according to analysts at Citi. But many market participants say there is something more powerful happening than simply a classic beginning of the year rally. "The market is behaving in a way that is very reminiscent of an early bull market," says Ed Yardeni, founder of Yardeni Research. UniCredit, the troubled Italian bank, has seen its shares rebound 110 per cent since their January 9 low. Mr Yardeni says the S&P 500 should rise about 8-15 per cent this year to close at 1,450-1,550. Larry Fink, head of BlackRock, the world's biggest asset manager, told Bloomberg this week that investors should be 100 per cent in equities. From a valuation perspective, the S&P's price-to-earnings ratio of 13.9 remains low and has been below its long-term average of 16.4 times for the past 18 months. "That is the longest valuation dry spell since the 13-year stretch that began in 1973," says Jack Ablin, chief investment officer at Harris Private Bank. Other investors are turning cautious. "It's important not to get sucked in by this rally," says James Sarni, senior portfolio manager at Payden & Rygel. We face an environment of slow growth and low inflation. Earnings are clearly off their highs and more companies are surprising on the negative side. In Europe, the mood is less ebullient but still optimistic. Sushil Wadhwani, a former member of the Bank of England's Monetary Policy Committee who nows runs his own hedge fund, has researched the high level of the equity-risk premium, the extra reward investors demand to hold shares over bonds. He says the elevated premium late last year was due to investors fearing not just a eurozone break-up but also a Japan-style extended economic slump. "If we think that people will become more and more comfortable [with the eurozone], then equities can continue to rally for a while longer because there is still value there," he says. Yet Mr Wadhwani is unwilling to endorse equities completely. He is confident that shares will outperform bonds but less sure they will do well in absolute terms. Andrew Milligan, head of global strategy at Standard Life Investments, one of Europe's biggest fund managers, is not getting carried away but is still positive. "The base case is that the rally continues but not at the same pace," he says. He is alert to the risks to the rally in what he calls "a very political year." The risk that he and Mr Wadhwani and Mr Yardeni all highlight is the French elections. Investors remain sceptical about the socialist candidate, François Hollande, and his self-avowed anti-finance campaign. Most feared of all, perhaps, is his desire to reopen talks on Europe's new fiscal pact, something investors fear could reignite the euro crisis. Mr Milligan instead highlights two other big risks: how the Iranian oil situation is resolved, and the US elections and any change of fiscal policy. In turn, Mr Yardeni frets about France, the Middle East and the possibility "that things get too good" and a burst of growth in the US leads to government bond yields backing up. For now, optimism prevails. But bullish investors might wish to ponder a statistic from Jim Reid of Deutsche Bank. He looked into how often the S&P 500 has remained above its opening January level for the entire year. He found only eight instances since 1928; the last was in 1979.