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For more than three years, Anna Feng didn't tell her husband that she had sunk nearly half of their savings into the Shanghai stock market. While he thought all their money was safely sitting in a bank, the value of the stocks plunged by almost 75%. But over the past couple of months, the Shanghai market has shown signs of life, and Feng, a 56-year-old retiree, has recouped half her losses. She's quietly hopeful that maybe she'll make it all back. "Everyone seems to be so optimistic about the markets now," she says.

Around the world, stocks have been on a tear. In Asia, for example, the Tokyo TOPIX stock index hit a 14-year high last week as a bull run in once-dormant Japan gathered momentum; Bombay's main equity index hit an all-time high in trading early Friday amid India's continuing economic boom; and Hong Kong shares reached a five-year high while indices in Singapore, Jakarta and Sydney set new records. And though stocks in Asia, in particular, are on fire, they are not alone. From Germany to Venezuela to South Africa, equity markets in both mature and emerging markets have moved up sharply this year—and show little sign of slowing. The Dow Jones World Stock Index, which excludes the U.S., has risen nearly 11% in 2006, easily topping gains in the U.S., where the Dow Jones Industrial Average is up a modest 2.2% since January 2.

The underpinning for stocks' strong performance, global bulls say, is straightforward. Economic growth continues to be strong in places where it has been buoyant for several years (the U.S., China and India) and is finally picking up in places where it had been notably absent—Japan and parts of "old" Europe. In Germany, Europe's largest economy, the Ifo Business Climate Index, a key indicator of economic health, reached a 15-year peak last month. Moreover, earnings and corporate balance sheets around the world are as healthy as they have been in years. In Japan, corporate profits have climbed for four straight years (the longest sustained increase since the 1970s) and consumer spending is rising briskly on the back of declining unemployment. Yuji Shimanaka, chief economist at Mitsubishi UFJ Research and Consulting in Tokyo, says Japan is now in "a golden cycle." So, for now, is much of the world. "It comes down to very simple macroeconomics," says Subir Gokam, an economist at CRISIL, India's largest credit-rating firm. "The global economy is growing without much inflationary pressure."

Is anything wrong with this picture? One very big thing, warn the skeptics. Interest rates are rising nearly everywhere, and if there is one simple adage that many investment advisers live by, it's this: "When rates are high, stocks will die." Indeed, one of the most impressive—or scariest—aspects of the current global bull run is that it has come in the teeth of central-bank tightening, most importantly by the U.S. Federal Reserve, which could slow growth in the world's key economic locomotive. The Fed has increased a key short-term interest rate—the so-called Fed funds rate—15 times dating back to June 2004, and is widely expected to raise it once or twice more over the next few months. A brief recession and the Sept. 11 terrorist attacks in 2001 spurred a prolonged period of very low interest rates. That boosted U.S. consumption—in particular the rate-sensitive housing market—and kept the global economy humming. But long-term rates are now beginning to tick upward: last week the U.S. 30-year treasury bond reached 5.04%, its highest level since late 2004, and the housing market is cooling off—potentially triggering an economic slowdown as homeowners cut their spending.

Central banks everywhere have been following the Fed's lead—even the Bank of Japan, which kept rates near zero for years to try to kick start businesses and consumer spending, has finally conceded that it's time to hike rates—which is why many analysts believe the stock-market party may end sooner rather than later. Higher rates flow through the global economy in a myriad of ways by curtailing borrowing and curbing business activity. Higher borrowing costs hurt corporate earnings, which is ultimately reflected by lower stock prices. Andy Xie, chief Asia economist at Morgan Stanley, says the world's equity markets have been surfing on a "tide of liquidity" for the past five years—meaning investors have been awash in cash, thanks to the easy-money policies of the world's central banks. With interest rates low, no fund manager worth his bonus wanted to park money in low-yielding money-market accounts. Stocks, for most investors, were the only game in town. The rise of hedge funds, which seek to earn high returns for wealthy investors in return for stiff fees, added to the pursuit of fat payoffs in markets all over the globe. Indeed, a flood of foreign institutional demand for stocks is one of the primary reasons why markets in countries like Japan and India have performed so well.

Now, the tide may be ebbing. Xie says "liquidity has slowed sharply" in the world's major economies, and investors who are still bullish had better be careful. "The last time [sentiment] was like this was in 2000," says Xie, shortly before the tech bubble was pricked in part by interest-rate hikes. Likewise, Xie expects rising rates to put an end to today's stock boom. Others aren't so bearish, but concede that higher rates may at least temper equities' recent giddy gains. Citigroup last month lowered its expectations for global stock returns for the next 12 months to a range of 4% to 8%—not bad, but down from its previous forecast of 8% to 12%.

While few deny the power of rising interest rates to curtail the growth in equity prices eventually, not everyone believes that moment has come yet. There are the calculations that economists do, and then there are "animal spirits"—the greed and euphoria that feeds into and prolongs stock booms long after the rationalists conclude they should end. India, some analysts believe, is now a classic case of a market where sentiment may be trumping economics, given that the market there has already tripled in the past three years. "All India's ducks are in a row right now," says Amit Tandon, managing director of Fitch Ratings India in Bombay. "There is a perceptible change in outlook and self-belief." That sense of exuberance isn't limited to India. They're feeling pretty good about themselves in Tokyo, Jakarta and Seoul, too. Central bankers the world over may be worried about the euphoria in equity markets getting out of hand, but this party may last a while.

• By Bill Powell | Shanghai
• Robust economic growth and strong corporate earnings have propelled global markets to new heights. But the bull may be ready for a rest