Although equity markets have rebounded strongly since the pandemic-inspired sell-off earlier this year there are a number of near-term risks that could make them vulnerable to a pullback, according to veteran investor Bob Doll.
Action taken by central banks and governments around the world to shore up economies and offset the lockdown conditions that prevented Covid-19 pandemic from spreading have buoyed equity markets.
As the below chart shows, global indices have rallied strongly since the markets bottomed around 23 March with blue-chip indices S&P 500 and DAX 30 up by more than 40 per cent in local currency terms.
Performance of indices since 23 March
Source: FE Analytics
Nevertheless, there is still cause for concern, said Doll, Nuveen’s chief equity strategist.
“Stock prices have risen dramatically since March, pushing valuations levels to lofty levels,” he said. “We are also growing concerned about technical indicators. In particular, the number of new 52-week highs is falling and market breadth is narrowing, as the rally has been driven by a relatively small number of companies.”
Doll continued: “At this stage of the market cycle, sentiment appears mixed: Investors seem simultaneously fearful of missing out on equity rallies while being concerned about the faltering economic recovery.
“In both the US and in Europe, we have seen signs that areas of the economy are closing or slowing as governments and policymakers are grappling with ways to control the pandemic without a significant medical breakthrough. This suggests that the global economy remains weak, faces numerous challenges and is struggling in places where virus cases are rising.”
The bottom line, said the strategist, is that the economy is likely to face “an uneven and bumpy recovery” until there is a medical solution to the pandemic.
“Both monetary and fiscal policy will remain supportive, but the former seems to have reached its limits and the latter is expensive and prone to political difficulties,” he added. “Looking ahead, we expect supportive policy should keep the economy from sliding back into recession, but equity markets have already priced in a better outcome than we expect.”
And while stocks should continue to make gains over the long term, said the veteran investor, in the short term, markets look vulnerable to a period of consolidation or setback.
As such, Doll said there are 10 observations and themes that investors should be aware of in the current market environment. 
The economy appears to be moving from a V-shaped recovery to something more mixed
Doll said there is a combination of factors that is casting doubt about the strength of the recovery. This includes school closures, new virus waves, worries over whether a new stimulus package will pass in the US, presidential election uncertainty and deteriorating US/China relations.
Jobs data is looking shakier
Another concern for Doll is the level of unemployment level in the US which, having fallen for some time, has begun to reverse and was back above the 1 million mark last week.
In contrast, housing is rebounding strongly
There were positive signs in the US housing market as new housing starts reached their strongest levels since 2016 with building permits experiencing their strongest increase since 1990.
The likelihood of a new stimulus package is already baked into market expectations
Such expectations mean that stocks are unlikely to get a boost if a package is enacted, said Doll, but could be vulnerable if no agreement is reached.
Inflation expectations are creeping higher due to a number of factors
Rising commodity prices, a falling dollar, surging money growth, tight inventories, disrupted global supply chains and rising labour costs – despite high unemployment – are all contributing to expectations of a more inflationary environment, said the Nuveen chief equity strategist.
Stock valuations are high, but key tailwinds remain
“We think ample liquidity and highly supportive monetary and fiscal policies should continue supporting stocks,” said Doll. “This suggests we could be due for a pullback, but that could create select buying opportunities, especially among some cyclical areas with more attractive valuations.”
Investors may have to cope with lower long-term returns
“Valuations have historically been a poor measure of timing, but they have a solid track record of indicating long-term returns,” the strategist explained.
“And with stocks at elevated valuations, investors are likely to struggle to meet their long-term portfolio goals. This suggests selectivity will be critical in the coming decade.”
The political environment could be less market-friendly next year
A Joe Biden presidency could see higher taxes for wealthy individuals and corporations, warned Doll, who said that there could also be heightened regulatory scrutiny across the energy, financial and healthcare sectors.
The US/China relationship is growing more hostile
As such, Doll said, less trade and more tension between the two countries regardless of the outcome of the US elections.
With markets at all-time highs, it’s worth looking at possible downside risks
Citing a recent Cornerstone Macro research report, Doll said that there are 12 possible downside risks investors should be cognisant of: a coronavirus resurgence, a lack of a new fiscal deal, at-risk commercial real estate prices, rising non-performing loans, uncertain state and local government funding levels, a possible US federal debt downgrade, a disputed presidential election, fractious geopolitics, emerging economies coming under pressure, a renewed US/China trade war, rising long-term interest rates, and inflation.