S&P 500 could rally, but risks still abound

The benchmark S&P 500 Index could hit new all-time highs—but those gains will be short lived, Wells Capital Management's Jim Paulsen said Monday, echoing the concerns of a market still unsettled by global risks and monetary policy.

"The catalyst that brought us from 1,800 to here, was evidence that the U.S. economy was not recessing. I think the catalyst that could take from where we are to upwards of 2,200 is better economic data coming out of the global economy," Paulsen. At least for now, conditions are ripe for stocks to continue their upward trend.

If we see better data out of the euro zone … I think there is a chance for a synchronized bounce that could take stocks higher," said Paulsen, Wells Capital's chief investment strategist. "I kind of think we might be headed higher here in the intermediate term, maybe breaking to new all-time highs."

This week, investors will be focused on the Federal Reserve, as its policy making committee is expected to leave interest rates unchanged at its two-day meeting. According to the CME Group's FedWatch tool, the chances the central bank hikes are zero, but are over 50 percent for July. For that reason, some market watchers think speculation over Fed policy can easily come back to haunt stocks, much as it did late last year.

"The problem is, in the United States, because we're at full employment, I think if we do pop higher we're going to have core inflation pick up," Paulsen said. "we're going to force the Fed to tighten faster, and we might have a sell-off at the end of the year based on overheat and Fed hike fears." U.S. unemployment currently stands at 4.9 percent, its lowest level in nearly eight years.

Dan Suzuki, an investment strategist at Bank of America-Merrill Lynch, stated that he expects S&P to close out the year at 2,000. He expected the index to fall prey to eventual selling pressure.

"I think what we're trying to say here is that the risks are pretty balanced, so that's not to say that you're not going to have some winners and some losers, but I think you have to be mindful that there's still some risk out there in the market," he said.
"Some of the concerns for why we lowered our target, they're still here today," Suzuki added. "In particular, I think that credit is going to continue to tighten, and be a headwind for the market."