Asset manager BlackRock is not excited about all-time highs in U.S. stocks.
"This is a tough and transitional moment for equities," said Kate Moore, chief equity strategist — Americas at BlackRock.
"We are more cautious on equities in the second half of this year," she said.
The hit a fresh all-time intraday high Tuesday after closing at a record Monday. The industrials sector on Tuesday hit a new intraday record high.
Moore said the global flight to quality is a factor in drawing investors to U.S stocks and sending them to record highs, but sectors with secular growth exposure and dividend growth offer the most opportunity.
As earnings season kicks off, areas of the market she's watching include health care, which has seen "significant upward earnings revisions," and technology, where she highlighted "sustained demand."
Moore is also watching the financials sector for revisions to earnings expectations and the ratio of dividends to earnings, an indicator of a firm's maturity.
Financial companies are among the first to report earnings as the season gets started this week. JPMorgan Chase and BlackRock are due to report results before the open Thursday, while Citigroup, U.S. Bancorp, Wells Fargo and PNC Financial Services are scheduled to post earnings Friday.
Significantly lowered expectations for a Federal Reserve rate hike this year have been a headwind for financials, the only S&P 500 sector still negative year to date. But looser monetary policy around the world could be positive in a low global growth environment, BlackRock strategists said.
BlackRock's global chief investment strategist, Richard Turnill, said expectations for more quantitative easing from the European Central Bank and Bank of Japan means the Fed likely remains on hold for the foreseeable future. He said the firm previously forecast one rate hike later this year.
Turnill and Moore were speaking Tuesday at the BlackRock Investment Institute's roundtable on the midyear global investment outlook
BlackRock is neutral on U.S. equities for the third quarter given historically high valuations and rising wages that could pressure profit margins, despite strong consumption and labor markets.
The June nonfarm payrolls report released Friday showed a surprisingly strong creation of 287,000 jobs and a slight rise in average hourly wages, for a 2.6 percent increase from the same period last year.
Other factors for U.S. stocks that Moore is watching are broad-based improvement in earnings, greater clarity on monetary and fiscal policy and their ability to create growth and increase confidence, and reduction in political uncertainty.
The firm expects last month's U.K. vote to leave the EU to send Britain into recession in the next 12 months, while political uncertainty within Europe remains elevated during the negotiation process that could take two to three years.
The impact to the U.S. will likely be "relatively modest," Turnill said.