These Are Two Major Risks To The Rally

These Are Two Major Risks To The Rally

The stock market is coming to a screeching halt, unless good news comes from two fronts, according to one strategist.

TIAA Investments' Brian Nick says domestic concerns and geopolitical factors in Europe, specifically, need to improve for markets to move higher.

On the domestic front, while analysts' estimates going into the current earnings season were positive, Mr. Nick believes the optimism may not be well-warranted.

"My concern is that we are not going to meet expectations by enough, plus the market has already rallied so far, so high just since the election to relatively lofty multiples," he said Tuesday.

"I am not sure how much more upside we have even if earnings season comes in as expected."

It's early in the season, but thus far Nick's concerns may hold some truth.

Bank earnings so far have yielded "mixed numbers" despite earnings beats from the likes of Morgan Stanley and Bank of America, while reports from tech giants Netflix and IBM raised revenue concerns even though both companies topped EPS estimates.

This leads Nick to believe that stronger economic data is needed for stocks to really move higher, as earnings may not drive the market as much as analysts had expected.

Nick's second concern lies with the outcome of the French election, with the first round taking place this Sunday.

While polls originally placed centrist candidate Emmanuel Macron as the lead contender against the extreme right-wing Marine Le Pen, recent numbers show that far-left candidate Jean-Luc Melenchon has been gaining ground.

The prospect of a runoff between candidates on extreme ends of the political spectrum leads Nick to believe that could be the worst scenario for markets.

"You could end up with the outcome where you have the two most extreme candidates on the left and right who actually agree on a lot of things," explained the strategist.

"[They are] basically both skeptical of the euro and the euro zone as a whole. That [outcome] would be very market negative in the short term, and potentially for the medium and long term as well."

"Any other combination probably gives us relative certainty to how the next round is going to turn out, and I think the market would rally on that news as early as next week," he concluded.

Another political concern across the pond is that the June snap election in the U.K. will negatively affect markets, but Nick explained that the markets are already pricing in a likely victory for PM Theresa May, and her re-election would push back the possibility of another election in the U.K. past the 2019 Brexit deadline, taking out a lot of volatility in the markets.

"So if you're looking long term, this looks like a stabilizing event ... rather than destabilizing, which is how the markets are taking it," he said.

On Wednesday, the U.K. Parliament voted in favor of June's election, making it the next big European political event once the French election wraps up in May.

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