Five Reasons to Sell, Sell, Sell

Stocks may be hitting record levels, but there are still plenty of factors that could derail this rally. Here are five reasons to worry

by Ben Steverman

• View Slide Show

U.S. stocks are at record levels. Earnings season is under way, with many expecting a modest rise in corporate profits. Unemployment is very low. So far problems with housing haven't infected the rest of the economy, which seems poised to bounce back from slow growth in the first quarter.

So what is there to worry about? Plenty. No matter how wonderful things look, the good times won't last forever. Even as most market observers remain bullish, we asked them what could derail this bull market. Stocks could keep setting records for months or even years, but it pays for investors to know what dangers are lurking out there. This Five for the Money lists the five biggest threats to the stock market rally.

1. Earnings

Will any stocks and sectors step up to the plate to push the market even higher? Investors are closely watching corporate earnings for clues.

Earnings season began this month and so far it's not clear whether corporate profits will keep pace with expectations. Expect a lot of volatility in the market as big players surprise investors with good or bad news. David Scott, chief investment officer of the Chase Large Cap Growth Fund, expects less support for the rally from financial and health-care stocks. So he's watching tech stocks closely. "They're a large enough part of the market that they can provide solid leadership," Scott says. Disappointments from big tech firms or key players in other sectors could scare the bulls in a big way.

2. Consumer spending

Consumers drive the U.S. economy, and so far they've held up well despite housing problems and high gas prices. Perhaps that's because unemployment is low—at 4.5% in June.

What are the risks for consumer spending? Charles Dumas of Lombard Street Research believes the U.S. economy is growing much more slowly than many on Wall Street think. One reason is weakening consumer spending. "Gas prices are really knocking the stuffing out of people's buying power," he says.

Some think Americans, who save very little and borrow a lot, are about to be hit by the realization that they need to cut up the credit cards. "We've been addicted to spending and borrowing, and we need to stop that," says Peter Schiff, president of Euro Pacific Capital.

Watch closely for data later this summer on the back-to-school season, which is an important time for retailers. "If this back-to-school season is bad, it could really highlight some weakness in the consumer," says Neil Cataldi of Susquehanna Financial Group. High energy prices might also catch up to consumers later this year, if heating costs rise as the weather turns colder.

3. Inflation

"Inflation is still a concern out there," says Sam Stovall, chief investment strategist at Standard & Poor's. Several factors could push inflation higher, including rapid global growth, the tightness in the job market, or higher commodity prices. For example, S&P forecasts oil, now about $75 per barrel, could be headed above $80.

Why are rising prices such a big deal? "The Fed has said, 'We will stop at nothing to defeat inflation,'" says Richard Sparks of Schaeffer's Investment Research. The faster prices rise, the more likely that Federal Reserve policymakers could decide to hike interest rates later this year. That would cool off the economy. The biggest worry is that the Fed is forced to raise rates while the economy is still growing only slowly, forcing the economy into a recession.