Will optimism curb market rally?

Stock markets have posted gains so far this year, but investors should avoid getting too comfortable, a Robert W. Baird & Co. analyst said in a research note today.

Stocks have risen on the promise of continued support from the Federal Reserve, and "while stocks no longer benefit from the widespread pessimism and oversold conditions that were present at the mid-December lows," popular averages are gathering momentum, chief investment strategist Bruce Bittles said.

"Absent excessive optimism, the path of least resistance for stocks in the near term is higher," he said. But he cautioned that the S&P 500 is overbought after a big rally in the last few weeks, and a turn for the worse in Europe could prompt another sell-off.

Stocks fell today amid continued worries about European debt. Still, "sentiment has not yet become problematic, and with the improvements being seen in the broad market, truly excessive optimism may be necessary to raise a caution flag," Bittles said.

The analyst rated some sectors a "buy," including industrials and consumer staples. Financials earned a "hold" rating, though Bittles said trends in the sector are still improving.