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Economist David Rosenberg: The Trump rally is ‘overdone’ and a pullback is ahead

David Rosenberg's market worries

Economist David Rosenberg says investors who expect the recent rally to continue much longer are making a big mistake.

The S&P 500 has risen 7.5 percent over the past six weeks largely on optimism surrounding Donald Trump's upcoming presidential term, but at this point, "the faith-based rally is overdone," Rosenberg said Tuesday on CNBC's "Trading Nation."

The bullish run "probably can get extended into the new year," but "we've just taken a very big leg up here, and levels of sentiment, levels of market positioning and levels of valuation do have me a bit worried that if we see any disappointment at all, it could lead to the sort of pullback we had last year."

Rosenberg explained that investors appear to anticipate that Trump will take all of the actions that should help stocks — increasing infrastructure spending, lessening regulations and cutting corporate taxes — while not taking any of the actions that could be expected to hurt corporate profits, such as restricting trade or creating a more uncertain geopolitical climate.

"I just think that's a low-odds bet that the market's putting down right now," the Gluskin Sheff economist concluded.

And it's not as if the market is attractively priced. Rosenberg calls current valuation levels "extreme" and said that even if the most optimistic expected earnings scenario comes to pass, a drop in valuations back to historically normal levels would bring the S&P 500 back to 1,950 — 14 percent below Tuesday's close.

On top of all that, he points out that macro catalysts are not breaking in stocks' favor, given that the U.S. dollar has surged and interest rates have risen dramatically.

All in all, Rosenberg would encourage investors to have "more cash on hand" in preparation for what he expects to be a rocky year ahead.