"Our point of view is geopolitics is still part of the game here, and I'm inclined to think this pause in the market, correction or whatever, has further to run in time, and more likely in price as well."
Emanuel said August is historically not a good month for stocks, and volume is typically light, but September is the worst month of the year for equities performance. "The typical seasonal pattern is a top in July and August and then a selloff in September and a bottom in October," he said.
So why the drift higher? "The way we're thinking about it, you basically have earnings on the bull side, geopolitics on the bear side and the Fed basically is the tie breaker. It explains the action perfectly," he said. "The Fed tilted ever so slightly to the hawkish side in the statement at the end of July, and the next day, the market started selling off. It couldn't just ignore Argentina, Russia and Israel anymore."
Stocks had also started to trade on positive economic news, as though each sign of an improving economy brought a Fed rate hike ever closer. The Fed is currently winding down its quantitative easing bond-buying program and is expected to end it this fall. Economists believe the Fed is not likely to begin raising short-term rates from zero until the middle of next year or later.
"Everyone's trading off central banks," said Jack Ablin, CIO at BMO Private Bank. China's still weaker economy, Japan's surprising overnight report of a 6.8 percent annualized contraction in second quarter GDP and slowing in Europe is stirring speculation that central banks there will step up their easing, he added.
Meanwhile, U.S. data is uneven. For instance, retail sales data Thursday showed just a 0.1 percent gain in core retail sales, well below expectations.
Read MoreWeak retail sales point to slower consumer spending
"The Fed's holding everything together," Ablin said. But he added that the U.S. stock market has a flight-to-quality bid in it as the U.S. is faring better than other economies.
"One of the big risks we're focused on is Europe. The conditions are not particularly robust. We as a firm continue to downgrade our GDP forecasts. We're now below 1 percent for 2014. The euro keeps falling against the dollar, we're now at an eight-month low. There are still risks at European banks," said Jonathan Glionna, head of U.S. equity strategy at Barclays Capital. "I think there continues to be risk in peripheral Europe, and risk overall in Europe, and it shouldn't be downplayed by U.S. investors."
For that reason, when the market frets over geopolitics, it is especially concerned about the situation in Ukraine and the impact Russian sanctions could have on the already weakened European economy. German and Europe zone GDP is released Thursday, and traders have been waiting to see how sluggish growth is after Italy was reported last week to have fallen into recession.
Meanwhile, the U.S. economy shows promise on the employment front, but troubling signs about the consumer. Besides the weaker retail sales for July, Macy's earnings disappointed, and that stock plunged and others in the sector fell with it.
The consumer will continue in the spotlight Thursday when earnings are reported by Wal-Mart, Nordstrom, Kohl's and J.C. Penney. On the other hand, the weekly jobless claims report could be a positive if it continues to show the trend of sub-300,000 claims, and a four-week average at the lowest level in more than eight years.
The weaker data and geopolitical fears have also been keeping yields low in the bond market, a plus for stocks. The 10-year was yielding 2.41 percent on Wednesday.
It also puts the focus on the Fed, with officials meeting at their annual symposium in Jackson Hole, Wyoming, at the end of next week.
"I think people are thinking something's coming out of Jackson Hole August 22," Emanuel said. There has been speculation the Fed would sound more hawkish, talking up the economy and the expectations for rate hikes next year. But bond strategists say the market would be surprised by that.
"Several people on the Fed had been saying they don't think the market is discounting risk properly in May and June when volatility was much lower," he said. "Essentially they got what they wanted. They got more volatility. My view is … the Fed needs a degree of uncertainty in the markets in terms of where they're going."
That would give the Fed more flexibility on its timing because the economic data remains spotty. Weaker retail sales follow a jobs report that showed 209,000 growth in nonfarm payrolls but unemployment at 6.2 percent. That report was seen as not robust enough to change the Fed's path.
Ablin said even though the Fed is moving slowly, there are already signs of some liquidity coming out of the markets. He pointed to wider spreads between high yield bonds and Treasurys.
But as for stocks, they are supported by the idea the Fed will not move too quickly. "It's got to be a central bank story. It's got to be a liquidity story. I worry if I see credit spreads continue to widen. The strongest leg we're standing on is going to disappear," Ablin said. He added that he has reduced some credit exposure.
Some strategists expect a bumpy time for stocks as they adjust to higher bond yields, ahead of Fed rate hikes. But Glionna said he expects stocks and rates can both move higher, as they have in the past if the economy improves. Glionna initiated coverage of stocks this week in his new role.
"What we're calling for is a transition to lower returns, where you're in a 7 to 8 percent total return environment which is consistent with getting (S&P) to 1,975 by year end and 2,100 by the end of 2015," he said. He added that EPS growth has been boosted by margin growth and share buybacks with revenue growth "the missing ingredient."
Emanuel said he is bullish longer term for stocks and expects them to be higher in six months and perform well in 2015.
He points to the bullish case in second quarter S&P 500 earnings. He notes revenue growth outside of financial companies is the best since 2012 at 4.6 percent, and earnings growth of 8.9 percent, without financial companies, is the best since 2011.
But there are questions about third quarter profit growth, particularly in a slow growth environment. "Basically the expectation is that it will be good. Certainly the market expects it. We expect it. … Certainly the question about the consumer has crept up again," he said.
Another factor that has been a double-edged sword for stocks is the dramatic decline in oil. While positive for airlines and other consumers of fuel, the energy stocks are under pressure and are down 2.2 percent in the last month, the third-worst sector in the S&P 10 major industry sectors.