JeffReeves

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Stocks started the week with a whimper, with a sharp two-day slide as second-quarter earnings started to trickle out.

That’s not an encouraging sign for investors.

They know that markets can’t go up forever. They’re waiting for the other shoe to drop. And underperformance in stock prices and corporate earnings could be the confirmation that the market is about to fall for an extended period.

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Now, I remain convinced that the U.S. economic recovery is durable, and that we’re not destined for another housing or financial crisis, which crippled the stock market and economy in 2008 and 2009.

However, the data are not looking too hot this summer. The disconnect between fundamentals and expectations could result in a correction of about 10% to 15% over the next few months.

Here’s why:

Earnings look shaky: It seems like a reduction in earnings forecasts is a staple of each quarter, and it’s happening again. According to FactSet, the estimated earnings growth rate for the S&P 500 in the second quarter was 4.9%, down from a forecast of 6.8% on March 31. Furthermore, of the 111 companies in the S&P that have issued guidance, a whopping 84, or 76%, have been negative. And that comes after weak first-quarter results.

Warmer weather isn’t helping: I know, that whole minus 2.9% growth rate for the first quarter and poor corporate earnings was written off as a result of bad winter weather. But it’s naïve to think that warmer weather can replace 100 cents on every dollar lost three or four months ago. In fact, in its recent outlook for the U.S. economy, the International Monetary Fund cut its forecast for U.S. growth this year by 0.8 percentage point to 2%. The reason? A harsh winter — and the resulting permanent loss of some growth potential. In other words, the spending that’s lost has been lost for good. We are seeing that in economic and earnings reports.

Housing trouble: The IMF also mentioned concerns about a struggling housing market, and those concerns are supported by a host of data and real estate experts. Karl Case, the economist behind the benchmark Case-Shiller survey of home prices, called the U.S. housing market a “crapshoot .” Meanwhile, inventory continues to rise, with housing supplies up almost 14% year-over-year as sellers start to outpace buyers. When you throw in the fact that 30-year mortgage rates have crept up to around 4.25%, adding to the cost of a mortgage, there seems to be a big risk that housing sales will flat-line. The fact that a lot of real estate demand is actually coming from foreign investors and not American families is equally disturbing, and is perhaps obscuring the real domestic slowdown in housing that we have been experiencing.

Price inflation, but not wage inflation: A sharp 2.1% increase in consumer prices this May has many inflation hawks sounding the alarm bells. And as I mentioned in my recent column. inflation in some areas — from food to gas to health-care costs — is actually much higher than the 2.1% CPI rate. Rising prices alone aren’t enough to freak me out, but wages continue to be stubbornly stagnant and that is indeed a big problem. According to the Wall Street Journal, “Wages for all private-sector employees increased 2% in the year ended in June. where wage growth has trended through all of this recovery.” If prices continue to rise but paychecks don’t, consumers will feel the pain, and spending may decline as a result.

Global unrest: First, it was Ukraine and Russia that dominated the news. Then it was the rise of the jihadist group ISIS in Iraq and Syria. Now, it’s Israel launching an offensive in Palestine that threatens to pitch the Middle East into further disarray. Beyond the humanitarian crisis in these regions — which should never be overlooked — there are serious macroeconomic impacts from these conflicts, not the least of which is the “risk premium” that will be added to energy prices.

Interest rate risk: I know, it seems that the Federal Reserve will never end its zero-interest-rate policy. And given the fact that the 10-year Treasury has drifted down about 50 basis points since January, it seems silly to bet on higher rates anytime soon. However, the headline unemployment rate is now 6.1%, and a recent Congressional Budget Office report estimates that full employment for the current workforce is 5.8%. We are awfully close to that number, and with inflation slightly above the 2% target of the Fed, it seems possible a rate hike may come sooner than expected, especially if the economy improves. Such a rate increase would raise the cost of borrowing but, more importantly, make interest-bearing assets much more attractive, resulting in a rotation out of equities.

The everything bubble: New York Times economics correspondent Neil Irwin writes over at The Upshot: “Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals.” Irwin calls it the “Everything Bubble,” and warns there are no cheap assets out there. Investors should be painfully familiar with this narrative, whether it be a discussion about how the S&P 500’s forward P/E ratio is pushing 17 or talk of a junk-bond bubble or predictions of a crash in Chinese real estate. Valuations are stretched across the board, and that just adds to the fear that many investors feel from the other data points on this list.

Jeff Reeves is the editor of InvestorPlace.com. Follow him on Twitter @JeffReevesIP.

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