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Investors who want to buy stocks should do so in the U.S., concentrating on domestically focused smaller to mid-sized companies, said Jim McCaughan, chief executive of Principal Global Investors, which has nearly $343 billion in assets under management.

"The euro zone is a value trap right now. It looks cheap compared to U.S. equities, but beware because the prospects for growth are not that great," he told CNBC's "Squawk Box" on Friday. "For equity exposure, stay here in the U.S.," with an emphasis toward mid- and small-cap stocks.

These companies won't get hurt by the stronger dollar and they're quicker to benefit from factors such as the improving housing market and cheaper energy, McCaughan said.

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Calling the U.S. economy "basically still quite strong," he predicted 2 to 3 percent growth for the rest of the year. While admitting that the first quarter was a disappointment, he argued, "I think we're on course for some pretty good stuff in the U.S."

In its third and final revision of first-quarter gross domestic product, the government Wednesday said the economy contracted by an annual rate of 0.2 percent, matching forecasts, compared with the previous estimate of a 0.7 percent decline.

The CNBC Rapid Update—which measures how daily economic reports impact growth forecasts—pegs second-quarter GDP at 3.1 percent.

With the economy expected to improve, McCaughan, like most market watchers, projects the Federal Reserve to hike near-zero percent short-term interest rates for the first time since 2006 sometime later this year.

The debate on Wall Street centers on September or December for the initial move.

He said he does not care when it happens—stressing the important aspect to the Fed guessing game is the rate trajectory. "It will not be a steep rise," because the economy isn't strong enough to sustain rates moving up sharply. He predicted the overnight lending federal funds rate at 1 to 1.5 percent in a year's time.

"The day the Fed puts … if it's in September [or] October, the market may take a tumble. It'll be a technical trading thing. It'll be just another buying opportunity," said McCaughan, whose Principal Global Investors manages money primarily for retirement plans and other institutional clients.

In another "Squawk Box" interview Friday, James Paulsen, chief investment strategist at Wells Capital Management, outlined a chain of events that could lead to a correction.

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