Harry Peterson
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What will burst the stock market’s bubble?

(MarketWatch) — The consensus on Wall Street is that stocks will continue to rise ... until they stop. So the question now is: What can stop the market’s bull run?

This is especially pertinent in light of Monday’s surge. The Dow Jones Industrial Average DJIA, -0.44% gained a whopping 264 points to close at 17,976. This was the biggest increase in eight weeks.

The best way to answer the question posed in the headline is to determine what has not stopped the bull so far. Here are some items that come to mind:

  • Europe’s problems have not;
  • Greece’s issues have not;
  • China’s slowdown has not;
  • The Middle East has not;
  • terrorism has not;
  • deflation has not;
  • falling oil prices have not;
  • the strong dollar has not;
  • the Ukraine conflict has not;
  • domestic politics have not;
  • the Federal Reserve might — but a rate increase is already priced into the market.

That said, our central bank has been supporting the stock market to an unprecedented degree since the economy took a tumble a number of years ago, so any increase in rates might have some unexpected side effects.

Keep an eye on corporate profits. Expectations for earnings in the first quarter, which is now coming to a close, are not high to begin with. Most analysts are looking for little or no growth compared with last year.

But even these estimates could wind up being too optimistic, since many assume that the economy grew by 2% or more in the first quarter. But as I said in my column of March 3, the severe weather may have reduced the first quarter’s rate of economic growth by a percentage point or more.

That could take a big toll on profits. For example, if first-quarter earnings fell from their year-earlier levels, it would be the first four-quarter drop in six years.

What really makes traders nervous is that this market has not had a 10% correction in three years. The stock market’s rise last year was the sixth annual gain and the longest skein since 1999.

Stocks have risen this fast in six years only twice before: in 1993-99 and 1923-29. Both instances were followed by a bear market and a recession.

Until this happens, party on!