After strong gains during the last three years, stocks are on more uncertain footing in 2015, says James Paulsen, chief investment strategist at Wells Capital Management.
"We have a more vulnerable market," he told
CNBC. "I'm not saying it won't go higher over the next few years. I think it's going to. But we have a market at 18 times earnings, sentiment is the calmest and most confident it's ever been," Paulsen said.
The S&P 500 index had a 19.37 price-earnings ratio Friday, up from 18.88 a year earlier, according to Birinyi Associates.
In an illustration of Paulsen's concern, the S&P 500 dropped 1.8 percent Monday to 2,021. And the CBOE Volatility Index (VIX) soared 12 percent to 19.92.
The S&P 500 could rise or fall 10 percent this year, Paulsen said. He forecasts the index will end the year near its 2014 close of 2,058.90.
Paulsen sees two competing narratives. "We've got much better [economic] growth — 3.5 percent, maybe up toward 4 percent. But we are also near full employment and very close to setting off inflationary indicators," he noted.
"We may melt up on better growth and bond vigilantes."
Economists' consensus has it that the Federal Reserve will begin raising interest rates around mid-year, and many stock-market participants expect the tightening will put an end to the six-year bull market for equities.
But not everyone sees it that way.
"There's this obsession with the potential headwinds from the Fed," Jonathan Golub, chief U.S. market strategist at RBC Capital Markets, told
The Wall Street Journal. "But we're talking about very good stock-market returns for two to three years from now."
The S&P 500 index generated a return of 13.7 percent last year, including dividends, and 32.4 percent in 2013.