These are the 3 biggest risks to the market, analyst says

  • The risk of "geopolitical melt-up" could have an impact on markets, analyst Doug Sandler says.
  • President Donald Trump could affect the markets even if he succeeds in passing his agenda, Sandler says.
  • Sandler also says an overvaluation problem could be looming in the next year.

There are three risks that could potentially trip up the marathon bull market, analyst Doug Sandler said on CNBC's "Power Lunch" Thursday.

Sandler, CFA at RiverFront Investment Group, defined the first as a risk of "geopolitical melt-up" — that investors will flock to put money in the markets in anticipation of a perceived geopolitical threat on the horizon.

The problem, counterintuitively, might emerge if those risks never materialize, potentially leading to overvalued stocks and investors' vexation.

"We've been pretty good over the last nine years of turning over every potential geopolitical risk that's out there," Sandler said. "I think there's now a risk that investors get used to it, build up a tolerance and if the geopolitical risks don't come, I think the market's going to continue to trade up and frustrate investors."

Sandler's second risk comes by way of President Donald Trump — not that he fails to deliver on his promises of tax reform and deregulation but that he succeeds.

"I think people may have counted him out too quickly," Sandler said. "He's moved more toward center, and I think there's a potential that he gets some of his agenda through, which is going to be really good for a number of industries that have given back the Trump bump."

Asked if Trump's recent collaborations with leading Democrats, including Senate Minority Leader Chuck Schumer and House Minority Leader Nancy Pelosi, could water down the president's ability to pass sweeping reforms, Sandler said, "It's all better than zero."

Brendan McDermid | Reuters

Mark Luschini, Janney's chief investment strategist, concurred with Sandler on "Power Lunch" that the president's politics are "providing a fertile underpinning for stock prices to advance." He cautioned, however, that stocks may be "a little out over their skis" relative to equity-supporting valuations.

"As long as we have noninflationary growth and the Fed acts glacially as we've seen them act so far in this rate hike cycle, then I think that's a support for equity prices to continue their cyclical advance," Luschini said.

Sandler's final risk area circled back to his first: If the markets continue to rise, an untempered melt-up could lead to a valuation problem in 2018 and beyond.

He said RiverFront's metrics find the U.S. market currently about 10 percent overvalued — "not far from fair value," he said.

"But the real opportunity is developed international — Europe, Japan, et cetera — and that's about 30 percent cheap," Sandler said. "So that's about where the U.S. was three or four years ago."