The Trump rally may be over for now: BlackRock analyst

Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Nov. 28, 2016.
Michael Nagle | Bloomberg | Getty Images
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Monday, Nov. 28, 2016.

The rally in U.S. stocks may have topped out for now, one major strategist says.

"I think the U.S. market needs time to digest the recent gains," said Russ Koesterich, head of asset allocation for BlackRock's Global Allocation Fund.

The three major domestic indexes and the small-cap Russell 2000 index have surged to record highs in the days since the presidential election. Banks have led the rally, and industrials have hit all-time highs as investors bet on President-elect Donald Trump's promises of infrastructure spending, tax cuts and slashed regulations.

The Russell 2000 has been a top performer, up more than 12 percent since the election while the S&P 500 has risen just more than 3 percent.

Some take the strong performance of the small-cap stocks as a good signal for equities overall, since those companies generally do better when the U.S. dollar is strengthening with expectations of better U.S. economic growth.

But BlackRock's Koesterich said he think's "the move in the small caps has been overdone." Small caps "benefit from this change in sentiment," he said. It's a "continuation of animal spirits, continuation of global investors' willingness to take risk, rather than tied to direction in the dollar."

On Monday, the small-cap index posted its first decline after on Friday posting its first 15-day win streak since February 1996. The S&P 500, Dow Jones industrial average and Nasdaq composite closed slightly lower, after ending at records in Friday's half-session, with the S&P at 2,213.35.

Analysts on average also don't see the benchmark index going much higher in the next few months. The average year-end target on the S&P 500 is 2,209, according to CNBC's survey of 15 market strategists last week, which includes two firms that gave only 12-month targets.

"One of the dangers for 2017 for U.S. equity investors is if earnings expectations start to come down, as they usually do, there's some near-term risks," Koesterich said. He also said the first year of a U.S. presidential administration is generally not a good year for stocks.

The S&P 500 has fallen an average 2.7 percent in first year of a Republican president's first term, on five occasions going back to 1945, according to CFRA.

Markets also haven't priced in much downside from the possibility of more protectionist trade policies. During his campaign, Trump called for a 45 percent tariff on goods imported from China, building a wall along the U.S.-Mexico border and potentially withdrawing the U.S. from international groups such as the World Trade Organization.

"Certainly any evidence that politicians or their policies (are) leading to conflicts in global trade is a risk for global equity markets," Koesterich said.