This blog post originally appeared on RealMoney Silver on March 21 at 7:17 a.m. EDT.

"Without a measureless and perpetual uncertainty, the drama of human life would be destroyed."

-- Winston Churchill
I have long written that the prospects for a smooth and self-sustaining domestic economic recovery and that the attainment of $95 a share in S&P 500 profits may be in jeopardy.

Recent events have provided renewed uncertainties and unforeseen dangers that cast more questions regarding the optimistic assumptions that underscore the bullish investment case.

To this observer, consensus corporate profit forecasts have become the "best case" and are no longer the "likely case."

Downward earnings revisions now represent the greatest challenge to the U.S. stock market.

Let's look at my friend/buddy/pal, J.P. Morgan's Tom Lee's two principal economic and profit forecasts that underlie the bullish market view:
  1. 2011 estimated S&P 500 profits of $97.50 a share; and
  2. real U.S. GDP (2011 over 2010) of +3.0%.
Here are the reasons why I see a greater uncertainty of outcomes:
  1. Energy prices. Higher energy costs remain the biggest risk to profit and economic growth. Japan's nuclear crisis has likely further increased our dependency on fossil fuels. U.S. policy is on a slippery slope on which oil might be increasingly impacted by the outside influences of Mother Nature and political developments -- all beyond our control.
  2. Input prices. Besides energy prices, a broadening rise in input prices also threaten corporate profit margins.
  3. Confidence. Consumer confidence is dropping, reflecting current events and continued screwflation of the middle class. The CBOE Volatility Index (VIX) recently broke out of a nine-month downtrend. If it continues to be elevated, capex plans might be revised lower. (J.P. Morgan has judged the VIX and capital spending to be loosely correlated.)
  4. Mutual fund inflows/outflows. Greater uncertainty has recently reversed retail inflows into domestic equity funds, serving to undermine the supply/demand for equities. Corporate buybacks ($500 billion-plus) and pension industry reallocation out of bonds into stocks, however, is an offset. (Every 1% move into equities produces $140 billion of buying power.)
  5. Middle East/North Africa. Geopolitical risks abound (and will likely linger) in the Middle East.
  6. Housing. The residential real estate market remains moribund; any further weakness in home prices will serve as a drag and will jeopardize economic growth.
  7. Monetary policy. Exiting QE2 will have an uncertain impact, so will recent monetary tightening in India and China.
  8. Tech questions. Renewed tech inventory and demand concerns in the defense (e.g., Sanmina-SCI (SANM)), optical (e.g., Finisar (FNSR)) and tablet spaces.
  9. Supply disruptions. In our increasingly interconnected world, the Japanese nuclear crisis has caused numerous supply disruptions.
  10. Business momentum. Given the confluence of events, first-quarter 2011 business activity likely ended weaker than expected. If businesses begin to treat the geopolitical and elevated oil prices as a more permanent condition, order cancellations and corporate-spending deferrals loom in the months ahead.
As a result of these factors (and others), I believe strongly that, at the margin, upside S&P 500 earnings and domestic economic surprises have peaked and that the probability of more earnings warnings and downward profits and economic revisions is likely on the ascent. This trend is not only U.S.-centric, as the near-term global growth prospects have also moderated recently due to slower-than-expected strength in the U.S. and China economies, the oil price spike and the Tohoku earthquake.

Doug Kass writes daily for RealMoney Silver , a premium bundle service from For a free trial to RealMoney Silver and exclusive access to Mr. Kass's daily trading diary, please click here.
At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.

Doug Kass is the president of Seabreeze Partners Management Inc. Under no circumstances does this information represent a recommendation to buy, sell or hold any security.

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