The bear case for stocks is easy, but it's the bull case that may win out this summer, analysts say.
Rising valuations, so-so earnings growth and questions about key parts of the economy, like housing, all make record high stock prices look a bit dicey. So does the risk from a variety of geopolitical dramas—in Iraq, Ukraine and Israel. Then there's the fears that growth could slow in major regions—Europe and China—putting the world economy at risk.
But while bears may be making the most noise on Wall Street, bulls expect to see stocks stay on a record-setting course this summer, fueled in part by a surge in merger activity.
The and Dow have persisted in making gains, with major indexes up more than one percent this month. The Dow closed Wednesday at 17,138, a new high. The S&P 500 trended higher to 1,981, 4 points below its all-time high. Both were slightly lower Thursday.
Stocks have had their hiccups and, for sure, there are pockets of the market with bubbly high valuations, as the Fed pointed out Tuesday. But aside from momentum names—in biotech and social media—and some small caps, many strategists see valuations as OK for now, giving the market room to chug higher.
"There are always risks in the investing world," Wells Fargo Advisors strategist Scott Wren said. "Some are well known and others have the potential to sneak up seemingly out of nowhere and bite the stock market. And right now we are most concerned with event risk, not economic risk."
Wren said he does not believe the U.S. economy will be a negative for stocks. Economic data have been mixed, with some housing numbers weak but jobs-related data improving. With the earnings season now underway, analysts have been watching company comments for clues about whether the much-anticipated rebound will come in the second half.
"Earnings growth is OK. It's not stellar. It's not booming, but it's OK. We're not going into a profits recession anytime soon. But … if you look at investors in general, everybody's got these sentiment indicators. Investors are worried about protecting the downside, not accentuating the upside. How can we be at a market top when everybody is worried about protecting downside?" said Richard Bernstein, CEO of Richard Bernstein Capital Management.
Stocks could continue to benefit from low rates and easy Fed policy into next year, and the market should also be bolstered by steady earnings growth in an improving economy, analysts say. But some investors, like Stanley Druckenmiller and Carl Icahn, said they worry about the potential side effects of too much Fed easing. Both expressed their concerns at the CNBC and Institutional Investor Delivering Alpha conference Wednesday.
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Leon Cooperman, founder of Omega Advisors, however, said he doesn't think stocks are overvalued. "There are pockets of overvaluation," he said at the conference. "But ... the market is basically in a zone of OK."
Cooperman and some analysts say the Fed's easy ways should keep stocks heading higher for now
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"We're pretty constructive still. We think earnings will come in on the positive side. Growth was forecast about 5 percent year over year, and we think it will be closer to 7 percent," said Andrew Burkly, head of institutional equity portfolio strategy at Oppenheimer Asset Management. "I think the biggest story of the earnings season that can really make it positive are the financials."
He said the earnings beats in the financial sector, from names like JPMorgan and Goldman Sachs, is even more positive since financials was the only major sector expected to see declining profits.
As of early Thursday, 66 S&P 500 companies reported earnings and 68 percent beat estimates on earnings per share, and 64 percent beat revenue forecasts, according to Thomson Reuters.
"I think the overall market is going to hold up very well until rates start to move higher," Burkly said. He said that's not likely to happen until six to nine months from now when the Fed gets closer to hiking the Fed funds target rate.
There are, however, three important signals analyst cite for another potential leg up for stocks—early stages of a pickup in cap spending, a better loan environment and a surge in merger activity.
Mergers are helping to lift confidence in the market, and signal that CEOs are more confident about the economy and their businesses. So far this year, there have been $852 billion in announced deals, according to S&P/Capital IQ.
Just this week, Reynolds American agreed to buy Lorillard for $27 billion, and Whiting Petroleum is buying Kodiak Oil for $6 billion, creating the biggest oil producer in the Bakken shale. But the most eye-popping was the so-far-rebuffed $80 billion bid by Rupert Murdoch's media empire for Time Warner, first reported Tuesday by CNBC's Andrew Ross Sorkin.
"I think media's a great area. It's a classic late cycle play. Valuations look reasonable. The whole idea of combining content with provider is a great longer term trend to stay with," said Burkly, adding he also expects to see more deals in the tech and health-care sectors.
But analysts point to small caps as one problem area in the market. Valuations are vulnerable, and analysts see them underperforming big caps. The Russell 2000 is down 3.4 percent month-to-date, while the Dow is up 1.8 percent.
"The valuations just got so out of line, and it's still out of line. Small caps are so overvalued relative to big caps. That's not a one- to two-month story. That's an 18-months story. Small caps are early cycle. Big caps are late. We're going through this internal rotation," Burkly said.
Bernstein said the stocks that are most at risk are the "disruptors," like Tesla. "These stocks are not just expensive. They're outrageously expensive," he said. Bernstein said investors don't believe momentum stocks are susceptible to economic downturns because they are a new trend. "People think they are safer than regular stocks," he said, adding that he sees real value in high beta S&P stocks like financials, consumer cyclicals and technology, trading below the market multiple.
"The disruptor stocks could have a big correction. I think the Russell might under perform, but I don't see it having a big correction," Bernstein said.
Burkly said technology and energy are both attractive areas. "I think as companies do more cap ex investment in their businesses, as opposed to buybacks, that's the trend you're going to be looking for. That brings you back to tech and big cap tech as the way to play that," he said.
Intel's positive earnings beat Tuesday and upbeat revenue forecast for the third quarter encouraged some analysts that the personal computer industry may be stabilizing. Intel surged more than 8 percent, and while some critics said the positive results may only last as long as customers upgrade away from Microsoft's XP system.
But Taiwan Semiconductor also gave an encouraging outlook, forecasting stronger third quarter results after reporting record second quarter profits on strong demand for high performance microprocessors, used in a variety of mobile devices. TSMC, the world's biggest chip maker, began shipping chips for Apple's phones and tablets in the second quarter, and that is expected to be a strong source of growth, according to a Wall Street Journal report.
In a recent interview, Tobias Levkovich, Citigroup chief U.S. equities strategist, said there are signs that cap ex is picking up. Based on a study of 700 companies, Citi analysts found that cap ex plans for 2014 have increased as the year has gotten underway. As of December, the companies, excluding financials, saw a 1.5 percent increase in capital spending plans for 2014 over 2013. By March, cap ex plans were up 5 percent for 2014, and by June, spending was expected to be up 6.8 percent.
"C and I (commercial and industrial) loans are picking up. That's either a precursor or independent indicator of capital spending," Bernstein said. The Fed on Wednesday reported in its beige book that overall lending activity has picked up across the country. About two-third of its districts reported rising loan demand with particular strength in New York and San Francisco. Credit quality and delinquency rates were also reported to be generally improved.
Read MoreBeige Book: Expansion at moderate to modest pace
"Corporate cash flows have been strong. But one has to remember that capital spending, expanding plant equipment is the riskiest thing for a CEO or CFO to do," Bernstein said.
"When you think about the spectrum of what to do with excess cash, the first thing you do is repurchase shares. It's not very risky. The second thing you do is you increase dividends. …Third step is M and A and we're seeing that. The fourth step is cap ex," Bernstein said.
While there's talk that merger activity could be getting frothy, Bernstein said one warning sign is that it is being done by some companies to capture foreign assets and shift their tax domicile away from the U.S. to avoid taxes.
The government has already fired warning shots at the practice. Treasury Secretary Jack Lew, speaking at Delivering Alpha conference, said Congress needs to pass sweeping tax measures to stop companies form moving operations overseas.
Read MoreLew presses for sweeping business tax reform
"I'm not one who believes the whole reason for an investment should be tax purposes. I'm not sure all this M and A is going to be done for the right reasons. But it does show CEOs and CFOs are becoming more confident in the outlook for their businesses but they're not overly confident," Bernstein said, noting so far there are not big inventory buildups or huge leverage on balance sheets.
—By CNBC's Patti Domm