Stock markets everywhere are enjoying a remarkable turnaround in investor sentiment.

Just 18 months ago, it was all gloom and doom as crude oil slumped to about US$30 a barrel, triggering worries about the damage it might inflict on the balance sheets of a host of companies ranging from energy producers to miners and banks.

Now, the big fear is missing out on the rally as emotion, rather than cool-headed common sense, drives more and more money into markets such as Wall Street when prices are at, or near, a top.

Still, despite all the talk of a bubble emerging in the stock market, there are sound reasons for the stock rally. Concerns over lofty equity valuations - notably in the United States - are being offset by a stronger pace in earnings.

At the same time, if you look beyond this stock market euphoria, you will find that the rally is confined to just a few counters.

On Wall Street, for instance, investors seek and pay a premium for companies with strong growth prospects such as those from the tech sector, while the broader market has stayed sluggish.

It is the same story here. What has propelled the Straits Times Index sharply higher this year has been the rally in the three local lenders as fund managers loaded up on these banking shares.

In fact, fund flow data from the Singapore Exchange shows that institutional purchases here have mostly been confined to bank stocks. In the first week of May, for instance, these institutions bought $309.5 million worth of shares, with the three banks accounting for the lion's share of purchases.

Retail investors have not participated in a significant way.

The fund flow data showed that they have been net sellers lately. For the last week of April, they sold a net $197.1 million worth of shares. This was followed by further sales of $362.4 million of shares in the first week of this month.

That fund managers are enthusiastic about bank counters is hardly surprising. This is because all three of them had surprised on the upside in their first-quarter results.

As Nomura Research analyst Marcus Chua noted in a recent report, DBS Bank had beaten average first-quarter earnings estimates by an eye-popping 21 per cent, while OCBC Bank had bested the estimates by 17 per cent and United Overseas Bank by 7 per cent.

One reason for the three banks' better-than-expected performances is their lower-than- anticipated loan provisions as they put the woes over lending to the troubled oil and gas sector behind them.

In any case, the loan exposure of the three lenders to the troubled oil and gas sector is nowhere near the levels which would give investors sleepless nights.

Mr Chua estimated that as of the first quarter of this year, the on-balance sheet exposure as a percentage of total loans to the oil and gas sector for DBS, OCBC and UOB was 2.3 per cent, 2.7 per cent and 1.2 per cent respectively.

Still, it is difficult to fault the cynicism of the retail investors who have been big net sellers of bank shares even as these counters staged a big rally recently.

Mr Chua noted that between last year's fourth quarter and this year's first quarter, nothing had changed fundamentally for the banks, even though sentiment has swung from relative bearishness to optimism.

"In our opinion, more clarity, in terms of asset quality (excluding the oil and gas sector), regional growth sustainability and banks' earnings, is required before the banks justify their higher valuations going forward," he wrote.

Even so, there is the hope that given the teflon nature of the markets, any sudden dip in stock prices would provide investors with yet another buying opportunity. After all in recent years, stock markets had invariably rebounded following bouts of anxiety.

In the months ahead, what are the sorts of risks faced by the stock market?

Since November, bourses worldwide had been galvanised by US President Donald Trump's promise to cut red tape, reform taxes and spend heavily on infrastructure after taking over the White House. This low-hanging fruit of stock market success is now probably plucked, as Mr Trump's plans run into opposition from the US Congress.

Unless the Trump administration and the US Congress can seal a deal, the usual worries dogging markets - concern over rising rates , fears of a China slowdown and so forth - are likely to occupy traders' attention once again.

In the past two weeks, financial markets got a harbinger of the possible bumps which they may face ahead when oil prices suddenly tumbled by more than 5 per cent in one day, as hedge funds, which had wagered heavily on oil rising to more than US$60, threw in the towel.

Not that the drop in oil prices flagged that something sinister is afoot. All the data suggests it is simply a case of too much oil chasing too few consumers - a classic supply glut, in other words.

Production cuts by Opec should have helped to resolve the problem but oil producers met their match in the US shale industry, which has taken advantage of the rising oil prices to quickly bring mothballed production back onstream.

No doubt, the big oil majors are well prepared for any fresh wild swings in oil prices and the impact that these might have on their balance sheets.

A Bloomberg report showed that for the first quarter, the five oil majors - Exxon, Total, Royal Dutch Shell, BP and Chevron - reported a combined free cashflow of US$11.4 billion (S$16 billion) as their austerity efforts - firing workers and cutting capital expenditure - bore fruit.

This is comparable to the cashflow which they had used to deliver between 2010 and 2014 when oil prices were trading above US$100 - or double of current prices.

But any fresh volatility in oil prices will delay decisions by the oil majors to increase their capital expenditure - and that will be bad news for the companies in the oil and gas sector hoping for a revival in their business.

To get the type of sustained rally which the stock market used to enjoy in recent years, crude oil prices will have to climb above US$100 again. Will this be possible?

Two years ago, as oil prices halved, analysts liked to draw comparisons between the downturn and the 1985 slump when crude oil prices also halved.

While the first part of the script had turned out to be true as rig orders dried up and the utilisation of vessels used in oil exploration dropped, the worry is that the script for the subsequent upswing may not play out the same way.

Unlike in the early years of last decade when the revival of oil prices had been propelled by the emergence of China as a big energy consumer, there is no new major consumer of oil waiting in the wings this time around to drive up demand for oil.

Utilities firms are increasingly using natural gas and renewable sources such as wind and solar power to produce electricity and this will dampen the consumption of fossil fuel. Demand for petrol may also slacken as more electric cars take to the road.

For buy-and-hold investors, this means that the previous strategy of holding cyclical stocks till the market swings higher may not be workable anymore. What they need to do is identify a fresh crop of stock winners. Simple to say but not easy to do.