This looks more like the beginning of a market correction than the start of a serious bull run, according to Julian Emanuel, U.S. equity and derivatives strategist at UBS.
"The wall of worry which has supported stocks for 8 years has given way to a deep sense of hope and optimism," Emanuel said in a recent research note. "Such optimism is often seen near the end of bull moves/beginning of corrections rather than at the early or mid-stages."
To be sure, "the market isn't necessarily getting it wrong," Emanuel granted in an interview on CNBC's "Trading Nation" on Wednesday. He added that the optimism "may very well be validated by economic growth, earnings results and legislative progress" under soon-to-be President Donald Trump.
Still, he believes expectations have become badly overdone. The consensus on Wall Street is that S&P 500 earnings will growth 12.4 percent this year, which "bakes in a lot of impact from tax reform that may or may not actually be a 2017 issue, and that's one of the things that gives us pause," Emanuel said. His own forecast is for 5.9 percent earnings growth.
If earnings are set to rise the amount Emanuel is expecting, that means the S&P 500 is now trading around 18 times 2017 earnings, which puts stocks "very near peak multiples." Meantime, "shorts in the market are at or near the lowest levels of the post-financial crisis period while complacency… is high."
While this apparent confidence may be "heartening, it isn't always a positive message for stock returns in the months ahead."
At this point, the strategist advises that investors stay away from surging sectors like the financials, and turn instead to stocks that actually dropped in 2016.
"The laggards will lead in the new year, and there's a lot to choose from, particularly in the beaten-down areas of health care, certain consumer discretionary and software stocks," Emanuel said.