1. The March 1st $85 billion sequester will not be averted because the White House and Senate will demand further tax increases which Republicans will not accept.
Further spending cuts will negatively affect stock prices due to a worsening of U.S. domestic economic data. Two weeks ago the FOMC confirmed this premise and cited reduced expenditures as a material factor causing a "pause" in the economic recovery during the fourth quarter of 2012.
2. Recent reports of declining mortgage activity coupled with higher interest rates confirms that the Federal Reserve is powerless to further stimulate the economy through QE programs.
This is significant because current stock prices and the U.S. economic recovery is largely due to the Fed's QE purchases putting significant downside pressure on interest rates. Interest rates have fallen 50% since 2008, with the yield on the U.S. ten year note decreasing from 4% in 2008 to 2% currently (chart).
Over the past five years, lower interest rates have caused increased refinancing and lending, which in turn has directly boosted bank's earnings (and thus stock prices). Furthermore, decreased interest rates have elevated home prices by making it more affordable to take out a mortgage.
However, interest rates have actually risen over 15% year to date with the yield on the U.S. 10yr note increasing from 1.78% as of January 1st to 2.05% currently (chart).
The recent increase in interest rates directly threatens bank's earnings and home prices due to declining lending activity and refinancing - a premise confirmed yesterday by Wells Fargo's management (see linked article above).
3. U.S. Corporate earnings are declining due to reverting profit margins and decreased revenue.
Reverting profit margins amidst lack of new revenue generation will directly affect stock prices due to lower corporate earnings.
Over the past two years U.S. corporations reported record earnings due to continually increasing profit margins. In other words, corporations are increasing income through cost cutting and streamlining instead of increased revenue.
However, the trend in expanded corporate profit margins will likely reverse course in 2013. Profit margins always eventually revert to their mean because at a certain point corporations cannot streamline themselves any further - the prime example being the decrease in Apple's Q4 profit margin after years of expansion.
In an environment of reverting profit margins, increased corporate earnings will have to come from increased revenue, which will require a continued economic recovery. However, a continued economic recovery in the near-term seems very unlikely due to the aforementioned factors of reduced government spending and higher interest rates.
Accordingly, after consideration of the aforementioned factors and given that stock prices are back near all-time highs, it would be wise for investors to consider reducing stock exposure until we see how the economy reacts to reduced government spending, rising interest rates, and the possibility of reverting corporate profit margins.
Disclosure: I am short SPY, XLF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.