Deficits from governments large and small pose the biggest challenge ahead to a stock market poised to go higher, a panel of experts told CNBC.
While the economic climate is favorable and valuations attractive, the market and economy remain susceptible to shocks, said Goldman Sachs analyst Abby Joseph Cohen.
"On the intermediate- to long-term side, we must do something to address not only the federal deficit but also the deficit at the state and local level," said Cohen, head of Goldman's Global Markets Institute. "Keep in mind much of this is related to long-term liabilities."
States faced total shortfalls for 2011 of $125 billion, according to the Center on Budget and Policy Priorities, and the number is expected to accelerate over the next two years. The federal deficit for the year is expected to be in the $1.3 trillion range.
Governments have used a combination of tax increases and spending cuts to meet laws required of all but Vermont to have balanced budgets.
Cohen said the biggest challenges for local governments lie in funding health care and pension plans.
For all the challenges, though, she said the likelihood of the economy getting substantially derailed is not strong. She and others on the panel pointed to an easing of unemployment pressures as well as better than expected growth in gross domestic product and manufacturing, though the housing market continues to languish.
"We regard the valuation today as reasonably attractive," she said. "Much depends on one's outlook for the economy. If you agree that the economy is looking better and corporate profits will be better in 2011, equities seem a good place to be."
In previous appearances, Cohen has said her targetfor the Standard & Poor's 500 is 1,250 to 1,300, meaning that December would have to yield a 5 percent gain in the market to meet the low end of that forecast.
"On a longer term, economies move markets, and the economy in the US is slowly but surely continuing to improve," said Blackrock vice chairman Bob Doll. "Eventually the economic improvement should continue and carry the day."
But Jack Bogle, founder of Vanguard, was not as optimistic. He said he sees a high likelihood of contagion from the European debt crisis.
"I don't see how it could help but be contagion," he said. "Any kind of contagion is going to spread and spread very quickly."