As U.S. stocks move into uncharted territory, with the Dow Jones Industrial Average hitting another record closing high and the S&P 500 within one percent of its 2007 peak, Jim O'Neill, chairman of Goldman Sachs Asset Management is turning cautious on his outlook for the market.
"I am not that confident about what happens next and as to whether all these trends are going to continue, not least because May is now less than two months away and the infamous 'Sell in May and go away, come back on St. Leger's Day,' "
O'Neill, the man famous for coining the acronym BRICs, which identified Brazil, Russia, India, and China as top emerging markets where investors could put their money for high returns, wrote in a note on Monday, referring to an old market superstition that investors should sell stocks in May, as returns in the period between May and September are typically weak.
O'Neill, an economist by training who joined the firm in 1995 as a partner, plans to retire later this year.
He noted that while U.S. stocks may strengthen further in the near-term, helped by positive economic data, valuations are beginning to look pricey.
"They are hardly bargain basement these days from a CAPE [cyclically adjusted price-to-earnings ratio] perspective," O'Neill said. CAPE is a modification of the PE ratio to account for the impact of the business cycle on earnings.
Stocks in the U.S. are trading at a cyclically adjusted price-to-earnings (P/E) ratio of around 24, compared with its historical average of 18.7, according to data from Goldman Sachs.
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Other major markets including Germany and the U.K. are trading at cyclically adjusted P/E ratios of around 13 and 12, respectively.
Jim McCaughan, chief executive of Principal Global Investors, which has $281.5 billion in assets under management, disagreed with O'Neill's prognosis. He told CNBC that U.S. equities were still not highly valued and would end the year higher, "albeit with a likelihood of some volatility in between."
"For the year as a whole a reasonable expectation might be 20 percent, implying another 10 percent to go. Attractive areas include small- and mid-cap [companies], with a high domestic content and manufacturing, including selected technology sectors."
McCaughan stated that the new all-time highs on equity indexes showed that attention had moved to the fundamental strengths of U.S. business,though the U.S. political stalemate continued to affect sentiment.
"The disarray, and frankly, childish games in Washington is causing an overhang to business sentiment. My positive attitude on the U.S. economy and equities is in spite of Washington, not because of it," he told CNBC Europe's "SquawkBox." He added that the deadlock could produce a buying opportunity. "The most likely political environment for the rest of the year is continued bickering between Congress and the administration. This could be a source of volatility for the market and may produce a buying opportunity for U.S. equities."
However, O'Neill is not alone is his concern over the outlook for U.S. stocks. Thomas Lee, chief U.S. equity strategist at JPMorgan, told CNBC on Monday that stocks are positioned for as much as a 5 percent pullback.
"In the short-term, if the data are weakening — and I think investor expectations haven't really adjusted to that — there's a chance for the market to consolidate in the short-term," he said. "Flat would be a good outcome. And I think a 5 percent drop is very possible."
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—Holly Ellyatt contributed reporting to this story.