Rising profits and record-low interest rates from the Federal Reserve have created a perfect environment for stocks during the past six years, with the S&P 500 more than tripling from its March 2009 low.
But eventually that nirvana will come to an end, says Andrew Smithers, founder of Smithers & Co. economic research firm.
"What we are looking forward to at some point is the combination of strongly rising interest rates and falling profits — and that is not a nice combination for markets," he told
The New York Times.
The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent for six years. Most economists expect the central bank to begin raising rates around mid-2015.
Fed policymakers on average forecast the fed funds rate target will rise to 1.13 percent at year-end.
As for earnings, S&P 500 profits are expected total 7.5 percent for 2014 and 7.6 percent for next year, according to S&P Capital IQ.
Meanwhile, renowned market strategist Tom Lee, founder of Fundstrat Global Advisors, says strong economic fundamentals will lift the S&P 500 to a double-digit increase next year.
But 2015 still may be a year of agitation for investors, as the ascent takes place through expansion of price-earnings (P/E) ratios,
Lee told CNBC. "As you move and mature in a bull market, P/E expansion is what takes root."
You may not find that a calming thought, given that the S&P 500 already had a trailing P/E ratio of 19.67 as of Dec. 27, up from 18.98 a year ago, according to Birinyi Associates.
"We are going to be surprised. It is going to be an uncomfortable bull market, but people will need to get used to that," Lee said.
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