The biggest risk to stock market rally isn't North Korea — it's the Fed, top Invesco market watcher says

The looming risk that could sidetrack stock market’s ‘animal spirits’

Stocks are off to a running start in 2018 with the and Nasdaq hitting recording highs.

"We have animal spirits. There is still a lot of excitement over tax reform, and we could see excitement over infrastructure spending," Invesco global market strategist Kristina Hooper said Tuesday on CNBC's "Futures Now."

But the market could soon give back some of the early gains.

Even though Hooper speculates the historic bull run could go on for some time, she sees a near-term threat on the horizon — and it has nothing to do with North Korea's nuclear ambitions or rising Mideast tensions.

"The biggest risk to the rally is the FOMC. We could have a decidedly different FOMC in 2018 than the one we saw in 2017," Hooper said. "Not only will we have a different chair, but we will have a different vice chair, and several different voting members."

Jerome Powell is expected to take the reins from Fed chief Janet Yellen on Feb. 5. Yellen's final Fed meeting is Jan. 30-31.

"Some of the most dovish voting members have rolled off, so this could be a different environment, particularly if they see signs of inflation," Hooper said.

Despite the risk, she believes the S&P 500 could be 8 to 12 percent higher by year's end. It's a level that may seem paltry by last year's standards, when the S&P 500 gave investors a 20 percent return.

"We could very well fall victim to a reversion-of-the-mean argument. It's been a long time since we've seen a correction or any kind of significant pullback," said Hooper. "I think that becomes a greater reality as we move through 2018."

Hooper doesn't expect a correction to be long and painful, but she is encouraging clients to look outside the United States to find more compelling valuations and for downside protection.

"I would use this opportunity to take some profits and ensure adequate diversification, which for most investors would mean adding to exposure internationally — including Europe, including Japan and, of course, including emerging markets," Hooper said.