The traditional summer lull in trading activity seems to have taken a firm grip on global stock markets. Many of the major indices appear trapped in narrow trading ranges and several are still exhibiting a downward trend.

The Irish market falls firmly into the latter camp and market activity in the first few weeks of the second half of the year indicates that an early return to bullish conditions is unlikely.

While Irish corporate profits continue to grow at a healthy pace and company chairmen are very optimistic about future prospects, it would seem that two key factors are pressuring Irish share prices. Firstly, domestic financial institutions would seem to be continuing aggressively to reallocate their weightings in Irish equities.

Historically, Irish pension funds have held more than 30 per cent of their assets in the Irish market, but this is now estimated to have reduced to around 20 per cent. It seems that the eventual average Irish equity weighting for Irish pension funds could go to 10 per cent or even less.

A second factor is the fear among overseas investors that the Irish economy is in grave danger of overheating.

Such worries have been articulated for over a year now and, in general, have been ridiculed by the majority of domestic economists and analysts, who point to the firm foundations of the current boom.

Nevertheless, these fears have persisted and evidence that overheating pressures are real is beginning to mount. The residential housing market exhibits increasing signs that it has become a financial asset price bubble. The easy availability of credit and the seeming inability of the planning system to produce enough new units suggests that demand will continue to outstrip supply for some time yet.

An even greater signal that overheating is now a real problem comes from the acceleration in the general rate of inflation, and it seems that a relatively high rate of inflation could persist for quite some time.

This, combined with an extremely tight labour market, is having the predictable effect of pushing up wage rates.

There can be little doubt that the Irish economy is now running up against severe capacity constraints. Whether it ends in a "soft landing" or a "bust" is impossible to predict. However, until the situation clarifies, fears that the boom will eventually end in a sharp slowdown will persist.

An examination of the share price leaders and laggards for the first half of the year among the top companies highlights how the domestic economy stocks have sharply under-performed.

The financials, Eircom and CRH have all delivered negative returns and, among the laggards, Smurfit is the only one with very limited Irish operations.

The leaders are far more heavily dependent on international markets. The domestic economy is of no relevance to Elan and accounts for a rapidly decreasing relative share of activity for Ryanair and Kerry.

Independent's Irish operations are important to the group, but it is the international e-commerce activities that have driven up the share price this year.

Despite the apparently attractive long-term value currently available in the Irish market, a return to more bullish conditions will probably only occur when the current domestic inflationary pressures abate.