The biggest fear about the current secular bull market keeping many expert observers up at night is the pervasive consensus of bullish sentiment itself. As the U.S. economy continues to outperform many of its global rivals, financial experts can’t help but notice that the gap between the gains of American equities and foreign ones is greater than the growth gap in the underlying economies.

The upshot is that some of the bull market’s loudest cheerleaders, such as Wharton professor Jeremy Siegel and Wells Capital’s chief investment strategist Jim Paulsen, are sounding a cautious tone as 2015 approaches. In various television appearances, Siegel has indicated that he expects a 10% correction in 2015 while Paulsen thinks that cheaper European equities might well outperform American stocks over the next year.

A 10% correction of the sort predicted by Siegel would be good news and could extend the longevity of the bull market, according to Liz Ann Sonders, chief market strategist for Charles Schwab. Prevalent bullish sentiment is becoming stretched and is a source of concern in her view.

If everyone is leaning to one side of the boat, a negative surprise could tip it over. Her biggest fear is a 1987-style “melt-up.” The S&P 500 climbed more than 40% in the first eight months of that year, only to drop more than 30% in October and wind up the year with a gain of only 5%. Speaking in New York in early December, Sonders noted that the 1987 crash occurred within the longest secular bull market in history, which began in 1982 and lasted 18 years.

The question she gets asked most frequently uses a baseball metaphor: “What inning is the bull market in?” Her answer is that it may be the seventh inning, but she quickly qualifies that by adding that baseball games have been known to last 12 innings or longer.

Uncertainty about Europe, China, Japan, the strong dollar and the collapsing price of oil (and the effect of all these things on the U.S. economy) continues to perplex investors as they search for ways to play the crosscurrents. Richard Bernstein, who runs the advisory firm named after him, remains optimistic about U.S. equities, but the weak Japanese yen is prompting him to overweight Japanese exporters of finished goods.

Paulsen of Wells Capital likes euro zone equities, and relative valuations are only part of his calculus. He reasons that the disparity between U.S. and European equities parallels the gap that existed in the late 1990s. Shortly thereafter, European stocks outperformed U.S. rivals for an extended period. In a letter to clients, he noted that while U.S. growth and employment will outpace Europe’s, the gap will narrow.

Matthew Coffina, editor of the Morningstar StockInvestor, says, “The market is mostly fully valued and investors should be looking at a longer time-ride of four to 10 years. Returns of 9% to 10% a year are unrealistic.

“The big takeaway,” he says, “is that investors should moderate their expectations. Investors who sold out [of the market] during the [2008] crisis and are thinking about getting back in should think carefully about how they behaved in past downturns.” He doesn’t think the market is poised for a major acceleration in the foreseeable future.

Coffina writes that Morningstar now sees relatively few opportunities in industries such as consumer staples, regulated utilities and real estate investment trusts. But Morningstar likes a few companies that produce leading brands and have exposure to the emerging markets.
Robert Johnson, director of economic analysis for Morningstar Inc., Chicago, says 2015 could bring more of the same: Overall GDP growth will likely remain stuck in the 2.0% to 2.5% range. “The good news is the economy is growing again,” he says. “The bad news is that it isn’t likely to get a lot better.”

What worries Johnson is that Europe will mismanage its slowdown, and that could lead to a dissolution of the euro zone. Or it might end in bank failures that hurt all financial markets.

“I think Europe is in really bad shape unless it begins to make some more painful structural changes,” he says. “Monetary policy is not going to save them. Also, I think China will slow down to growth under 5% over the next five years [because of demographics, not a profound failure]. How well they manage that slowdown process is a major concern of mine.”

Are there things that could help the economy? Looser, but not-too-loose, lending policies, especially for mortgages; a better corporate tax policy; selective infrastructure building and improvements; and better education and training policies, Johnson says.

Roger Aliaga-Diaz, a principal and senior economist with the Vanguard Investment Strategy Group in Valley Forge, Pa., says, given that “the increasing share of U.S. companies’ earnings in the U.S. equity market is generated overseas, one would think that there is an increasing influence of world affairs on the performance of U.S. markets.

“In theory, more international trade and more international capital moving across borders mean that global equity markets are becoming increasingly correlated,” he says. “However, the reality is that U.S. markets haven’t been very responsive to isolated world events, as meaningful as those events may have been for regions where they took place.”

For example, several crises overseas had no persistent resonance in U.S. markets—not the Japanese collapse in the ’90s nor the crises in Mexico in 1994, Asia in 1997, Russia in 1998 or Brazil in 2002.

“More recently, the U.S. equity market fared well on average throughout the deepest portion of the euro-area crises,” Aliaga-Diaz says, despite gridlock in Washington during that period.

He sees bright spots in the current U.S. economy. GDP growth is now above the trend for two key reasons: The pace of consumer deleveraging is easing. There are also signs that business investment is picking up moderately—an indication firms may be more optimistic about future demand prospects. And job growth is at a pace where “we could see the unemployment rate approaching levels consistent with full employment sometime in 2015.”

But he also sees pitfalls.

“Frankly,” he says, “things that worry me on the domestic front are Congress and policy gridlock: They have been particularly damaging for the consumer and business confidence … and those have significant impact on the markets.

“Hopefully, we won’t get back to the unproductive discussions about raising the debt ceiling,” he says. “But there are other, much more significant issues that remain unresolved that Congress needs to tackle soon, such as tax reform [and] solving the longer-term structural problems in the U.S. federal budget, among others. The capacity to compromise and make decisions efficiently would be tested, and the markets would be looking for some sign of cohesion in policy making.”

Terry D. Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis, says he expects U.S. equities to “grind” higher and the U.S. economy to limp along in 2015. (He uses the word “grind” three times during the course of the interview.)

“The prevailing wisdom is that the market got ahead of itself,” he says. “We are in the sixth year of a bull market, and investor nervousness is high.”

He cites the pullback the market saw in mid-October. He says it might be too early to see a significant pullback while the
market is at or near all-time highs and profit margins are near peak levels, but the market may see some volatility during 2015.

Sandven sees equity prices as still moving up, but possibly at a slower pace. He says the economic outlook is optimistic for the beginning of 2015 and cites an increase in consumer discretionary spending and low energy prices that should bode well for the economy.

He says some sectors might outperform. He cites health care as “a favorite for all seasons.” He likes the technology sector, too, as U.S. consumers continue to purchase the latest devices such as cellphones and TVs.

A possible problem is a slowing in global economic growth. But he notes the global economy isn’t slowing at an accelerated rate.

The other wild card, Sandven says, remains Europe. The European economic slowdown may affect the earnings of U.S. multinationals.

What keeps him up at night? Geopolitical tension could derail the market. Renewed inflation and higher interest rates could also put pressure on margins.

“It’s an earnings-driven market,” Sandven says, explaining that the market needs the global economy to grow to support a higher equity market.

The economic slowdown in China is also worrisome, he says.

He adds that continued gridlock in Washington has already been factored into the financial equation—and that this is not necessarily a bad thing, though it’s worrisome when Congress starts talking about reform. He expects noisy budget battles to continue. Republicans taking control of the U.S. Senate might turn out to be a positive, he notes, if it leads to bipartisanship.

“History shows that bipartisan governance can be good for equity performance,” Sandven says.

“For me, the pace of earnings growth and/or inflationary pressures at some future time will be the biggest hurdles for the equity market. At present, the U.S. economy continues to reflect varying degrees of improvement, and the fundamental backdrop of rising earnings, low interest rates and restrained inflation remain intact. Hence, while a market pause is in order, I still think we’ve a buy-the-dips, grind-higher equity market.”

William L. Haacker is an award-winning journalist and editor who has worked for various New Jersey newspapers, including Gannett New Jersey.