Valuations are high, volatility near all-time lows, and policy rates on the rise; investors, meanwhile, are the most optimistic since 1987. On top of all that, the geopolitical picture is arguably more unsettled than at any point since the late 1970s. So who in their right mind would buy equities?

With the standard caveat that we possess no knowledge of what the future will bring—not to mention the fact that the rally since 2009 is already extended—we believe the pieces are in place for a fourth quarter melt-up in the US equity market.

Put simply, the inexorable rise of the S&P 500 has put many equity and hedge fund managers in a position where they are trailing the index for not only the third consecutive year, but five of the past six. Further, there are signs retail investors are beginning to feel their oats, encouraged by the success of high-profile IPOs like Alibaba, as well as the strong after-IPO performance of recent debuts such as Facebook and Twitter. Political factors also seem aligned, with the administration and Federal Reserve unlikely to rock the boat before the election. Equities could also get a boost from seasonal/technical factors related to the so-called presidential cycle—the next three quarters (fourth quarter of the midterm year and first and second quarters of the following year) have since 1949 produced average returns of 8.0%, 7.5%, and 5.2%, respectively. And finally, given zero interest rates across the developed world, sovereign and corporate yields plumbing all-time lows, and the specter of a Chinese slowdown and/or slow-motion European collapse, US equities continue to benefit from the TINA (There Is No Alternative) principle.

We certainly do not mean to downplay the negative factors cited above, and as explored in various other papers we expect the current central bank experiment to end badly. But in our view this rally has never been about fundamentals; rather, investors have been forced out the risk curve by central banks desperate to keep risk asset prices levitated. The fact that people know and generally dislike this is irrelevant to whether the rally can continue. JPMorgan recently noted that in its view, “the current episode of excess liquidity, which began in May 2012, appears to have been the most extreme ever in terms of its magnitude and the [forthcoming] ECB actions have the potential to make it even more extreme.” And markets rose on September 24 after rumors circulated that China would replace central banker Zhou Xiaochuan—widely viewed as resistant to broad-based “stimulus”—with someone more open to such measures. In other words, if you like your liquidity, you can keep your liquidity.

As noted, geopolitical worries could also prove a boon to US markets. US assets remain “safe havens” until proven otherwise, and some sort of exogenous event could not only exacerbate the recent US$ rally, but push up asset prices as well if the Fed is viewed as having to hold its fire for a bit longer. Again, such pressure would likely be exacerbated by underperforming equity and hedge fund managers looking to boost returns before the end of the year.

For those interested in betting on this outcome, there is no one best vehicle. Out-of-the-money call options are cheap relative to recent history—they are also very cheap relative to puts, but much of this has to do with high prices for puts—but the trouble with calls is that implied volatility generally falls as markets rise; thus, one must not only be right on the direction, but the magnitude of the rise must be substantial. Futures are perhaps a “cleaner” option, and of course one could simply boost equity allocations through an index exchange-traded fund (perhaps with some of the cost offset by selling out of the money calls at some predetermined level).

To be clear: this is not a valuation call, and does not change our view that things will ultimately end badly. And we could certainly be wrong (indeed, we expect more than a few people will view our making such a call as a clear sign of the top). But in our view, the chances of a US equity melt-up in fourth quarter 2014 are greater than most believe.

Eric Winig is a Managing Director on the Cambridge Associates Global Investment Research team.

For more on the topics discussed in this edition of C|A Answers, please see our recent research: Central Banks Step Up Equity Buying—Should Investors Care?, How Far Will US Rates Rise in the Next Cycle?, Reading the November US Mid-Term Election Tea Leaves, and Echoes of 2007?.

Cambridge research publications aim to present you with insights from a variety of different viewpoints. The views of our Chief Investment Strategist can be found each quarter in VantagePoint.