Levkovich sees S&P500 at 1,725

NEW YORK (Reuters) - U.S. stocks will likely gain about 14 percent in the next 12 months, but China's post-Summer Olympics policies and possible U.S. trade protectionism could create headwinds for the market's rally, Citigroup's chief equity strategist said on Monday.

There is more than a 90 percent chance that the U.S. stock market will go higher because Citigroup's models for gauging investor sentiment are still very bullish, Tobias Levkovich said at the Reuters Investment Outlook Summit.

The benchmark Standard & Poor's 500 Index .SPX will likely hit 1,600 by year's end, and 1,725 by next summer, Levkovich said. Then a confluence of events could overwhelm the rally, he said.

Investors believe that China will do everything possible to hold a successful Olympics, Levkovich said. But in September 2008 changes to health-care and social security provisions could spark unease. Already, there have been riots in China over a decision to extend the country's one-child policy, he said.

"The concept here is that there are issues in China that will have ramifications on civil disobedience," he said.

A widening U.S. trade deficit could become a presidential campaign issue and populist efforts to stem or reverse the shortfall could have ramifications for the global economy, he said.

"There is angst among those workers that plays out onto a political spectrum and politicians take advantage of that for political gain," he said. "The rhetoric has definitely stepped up."

Levkovich said both Democrats and Republicans are falling down on trade and immigration, which could lead to a period similar to the sluggish growth and rising inflation of the late 1970s and early 1980s that was known as stagflation.

"Both sides of the political spectrum are going at it the wrong way," he said. "From a purely market-orientated perspective, stagflation is a much greater threat than an energy shock."

Financial markets are driven by fear and greed, he said. "You don't want to scare off people; it's not healthy," he said. "This kind of fear is not something I would welcome at all."

Other concerns in the second half of 2008 to be aware of are a possible decline in profit margins, which could affect share prices. A risk of rising labor costs could cut into corporate profits, and a fall-off in immigration would only exacerbate that, he said.

"What data is showing us that we are starting to see margin pressures develop the past six to nine months," he said.

Next year is also an important milestone for baby boomers as people who retire start to draw on benefits more aggressively, he said.

Levkovich said he doesn't view rising market interest rates as halting a stock market rally that has overcome a number of investor concerns. Those concerns often are described in trader parlance as a "wall of worry."

"This rally is scaling cliffs of concerns, because cliffs are more daunting than walls. There is no shortage of things to worry about," he said.