"There's always a risk that some extraneous factor comes in and makes us reawake to the reality that stocks are a little overvalued. I think oil prices are the biggest risk. Rates are a potential risk. I think if we get another strong employment number in early September, and Europe doesn't [negatively react] in terms of Brexit, I think the focus could be back on the table for September, and that could be the big post–Labor Day surprise," said Gina Martin Adams, institutional equity strategist at Wells Fargo Securities.
Expectations are low for a Fed rate hike in September, but Friday's 255,000 payrolls for July was a shocker after June's 292,000 jobs. On Wednesday, markets will watch for more information on the job market in the Job Openings and Labor Turnover data at 10 a.m. EDT. There is also a $24 billion 10-year note auction at 1 p.m. EDT, and the monthly federal budget release at 2 p.m.
There are a few earnings including Michael Kors, Ralph Lauren and Wendy's before the bell. Sun Life Financial, Shake Shack, Blue Buffalo, Flowers Foods and Silver Wheaton report after the market close.
The S&P 500 closed slightly higher, up less than a point to 2,181, and the Dow was up just 3 at 18,533. The Nasdaq rose 12 to a record close of 5,225.
Adams said there's room for the market to move higher, particularly as sentiment remains so negative.
"The fundamentals are a little stretched, but the technicals look very good, and I've learned far too many times the hard way not to ignore the technicals," she said. "There's a lot of bears out there, and that negativity only fuels the fire of an upward direction. The economic landscape is not bad. It's not fantastic. The earnings stream is improving. It doesn't look great, but it's improving. There's not a lot in the way of the market except for the valuation argument."
Adams said consensus is now that S&P operating earnings will be flat in the third quarter, down from earlier expectations, earnings would finally show a gain. The S&P 500 operating earnings were down about 2 percent for the second quarter, with most companies reporting.
She said energy should stop being the drag it has been, though there is some dangerous complacency in the view that oil is not going back into the $20s. "The risk is that it has become the consensus view that we're not going to test the February low. If you do have a correction, it represents substantial risk to stocks. $40 is tolerable. $40 is the bottom of range of expectations. It also represents a substantial psychological level. Below $40, people get very nervous," Adams said.