Increased investor optimism since the federal election has not been matched with earnings recovery, as the Australian sharemarket continues to look expensive.
The forward price-earnings ratio - a method of valuation dividing a company's share price by earnings forecasts - for the benchmark S&P/ASX200 has remained well above its five-year average of 13.7 times, with the market priced at 15.4 times.
After a disappointing annual meeting season that has seen several earnings downgrades, the likelihood of any upgrades seems low, said Credit Suisse analyst Damien Boey.
"It's certainly not sales or earnings which are shooting the lights out here," he said. "I think this round of P-E expansion is very unusual."
Since September, forward P-E ratios have remained relatively stable, indicating that investors in cyclical stocks are waiting for earnings to catch up. "It's unusual and to my mind, it's dangerous," Mr Boey said. "It's optimism built upon optimism."
Investors will be keenly watching capital expenditure numbers, due on Thursday, in the hope that non-mining investment can pick up what is expected to be lacking from mining investment.
In recent years, mining investment has been a key driver of the economy, but future spending is expected to fall sharply as miners continue to consolidate projects rather than engage in new mega-projects.
"Over the next few years we have a big capex cliff that we need to offset, and it's still not apparent that the usual sectors, like retail and housing, will be recovering sufficiently strongly to offset what's happening with the mining capex downturn," said Mr Boey. Australia's market has re-rated over the past year, said Deutsche Bank strategist Tim Baker. Compared with major regions, Australia's price-to-earnings ratio is on the high side, but Mr Baker said there were reasons it could remain supported.
"Resources and cyclical industrials together account for 37 per cent of the market, compared to the 10-year average of 44 per cent. A normalisation of earnings in time should lift this ratio, and investors may be willing to look ahead and pay a higher near-term multiple than normal."
The second reason, according to Mr Baker, is that Australia is likely to enjoy solid support from superannuation funds.
Goldman Sachs also agreed that the Australian market looked expensive, relative to global markets. "Looking for value has become increasingly challenging as the rally has extended and earnings have continued to disappoint," the investment bank said in its outlook for equities.
Goldman Sachs said it expected ASX 200 earnings to grow by 9 per cent in 2014, 3 per cent below consensus, after single digit falls in the last two years.