A Stock Market Rally is Built on Narratives That Are Loaded With Risks

Optimism on Wall Street is soaring, with one strategist after another raising their outlook for the S&P 500 as the index keeps setting fresh record highs.
But while the bullish momentum has become a near-consensus view, even the most optimistic investors admit the rally faces risks.

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With valuations among the steepest of the century, analysts point to several potential stumbling blocks: cracks in the artificial intelligence trade, fallout from former President Donald Trump’s trade policies, ballooning federal debt, and signs of a cooling labor market.

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“All-time highs are always encouraging except for the last one,” noted Sam Stovall, chief investment strategist at CFRA. He still expects the uptrend to continue, in part because U.S. stocks are rallying alongside other major global markets, a historically reliable signal.
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For now, investors seem to be treating risks like IPO disclosures: real but not enough to spoil the enthusiasm.

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In just the past week, Deutsche Bank, Barclays, Wells Fargo, U.S. Bank, and Yardeni Research all lifted their S&P 500 forecasts. Looking further ahead, Goldman Sachs and Morgan Stanley also published bullish projections into 2026, expecting the Federal Reserve’s rate cuts anticipated to begin September 17 to fuel another leg higher.

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According to Dennis DeBusschere of 22V Research, the last three months have delivered what he calls an “everything rally,” with strength across sectors. But he warns this level of broad-based optimism is rare, happening only 1% of the time historically. Still, 22V expects the S&P 500 to hit 7,000 before year-end, up from Friday’s close of 6,584.29, a 12% gain for 2025 so far.

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Here’s a breakdown of the main risks keeping even bullish investors cautious.

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For the past two years, the main worry with AI was missing out on its upside. The technology drove trillions in new market value, but now some caution is creeping in.

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Keith Lerner, chief investment officer at Truist Advisory Services, believes AI’s productivity potential remains huge but warns that expectations are sky-high. “We’re still invested, but the numbers need to deliver,” he said.

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Challenges include China’s DeepSeek emerging as a competitor, ongoing U.S.-China tensions over advanced chips, and the heavy market concentration in tech. Today, technology accounts for about one-third of the S&P 500, an even bigger share than before the 2022 tech-led downturn.

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“The risk is that the market can’t stand without tech,” said Jonathan Golub, chief equity strategist at Seaport Research Partners, who forecasts the index at 6,700 by year-end. “Everything now depends on the sector’s strength.”

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Earnings Expectations on the Line

Recent AI-driven rallies in stocks like Oracle and Broadcom add another layer of risk: disappointing earnings. Current valuations assume robust growth will continue, noted Drew Pettit of Citigroup. Citi’s year-end target sits at 6,600, near current levels.

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Excluding the post-Covid rebound, the S&P 500 is now trading at one of its richest price-to-earnings ratios since 2002. “The market is priced as if nothing can go wrong,” Pettit explained. “Companies need to beat and raise guidance consistently there’s no margin for error.”

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Data supports his caution: second-quarter misses led to the sharpest stock selloffs in nearly three years, according to Bloomberg Intelligence. Tariffs could also hit earnings with a delayed effect, warned Jill Carey Hall of BofA Global Research, who sees the index ending 2025 at 6,300 about 4% below current levels.

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Trade disputes add another layer of unpredictability. Even if the Supreme Court were to strike down tariffs and force refunds, that could backfire by driving interest rates higher due to swelling government debt, cautioned CFRA’s Stovall.

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Perhaps the most familiar threat comes from the jobs market. A recent downward revision revealed 911,000 fewer workers than previously reported, while jobless claims hit their highest level since 2021.

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“In that environment, it’s hard to justify the double-digit earnings growth investors expect,” said Neil Dutta, head of U.S. economic research at Renaissance Macro. While weaker jobs data has ironically fueled rallies since it boosts Fed rate-cut hopes the underlying issue is that fewer workers mean slower wage growth and weaker consumer demand long term.

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“It’s a ‘heads I win, tails you lose’ market,” Dutta added. “Momentum can last, but when it cracks, it can unravel fast.”

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Golub of Seaport echoed the concern, saying his year-end target would be higher if not for labor-market weakness. While unemployment remains low at 4.3%, the trend in hiring looks troubling. “It hasn’t shown up fully yet, but the trajectory is worrying,” he said.

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