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Some money managers are flashing caution in a bull market

Record market highs, strong economic data, and positive fundamentals typically make for a smooth bull-ride. But don't let tranquil markets lull you, some money managers are warning.

In the earnings season currently underway, over two-thirds of companies have exceeded consensus earnings estimates. S&P 500 earnings are now forecast at 5 percent growth for the fourth quarter versus last year, up from the 4.6 percent estimate as of last week, says Bill Stone, chief investment strategist at PNC Asset Management Group.

A narrower trade deficit, higher mortgage applications and lower initial jobless claims paint a bright economic picture ahead of Fed chair Janet Yellen's semi-annual testimony to Congress.

Guarding against policy and political volatility is essential, says Sameer Samana, Wells Fargo's global quantitative strategist. Samana is currently neutral on stocks with an "overweight" rating on bonds.

Among stocks, Samana likes cyclicals — shares of companies whose stock prices are typically steered by the health of the overall economy. His portfolio skews toward the industrial, discretionary, financial and healthcare sectors — all sectors seen as gaining from the implementation of President Trump's business policies.

Yellow "Caution" tape is displayed outside of the New York Stock Exchange.
Michael Nagle | Bloomberg | Getty Images
Yellow "Caution" tape is displayed outside of the New York Stock Exchange.

Despite sanguine news reports on President Trump's foreign policies, which now seem to have taken a more conventional tone, investors still need to remain agile should the situation change, noted Brian Belski, BMO Capital Markets' chief investment strategist, who like Samana appeared on CNBC's "Squawk on the Street" Monday,

Investors are pouring money into passive investing vehicles such as exchange-traded funds, with Vanguard leading the ETF top 10 pack, globally. Indexing continues to win investor dollars. But that's not where the returns are, finds BMO's research.

"Investors are ignoring a more important characteristic – correlation between stocks has dropped significantly. We believe this has significant implications for portfolio management – namely that an active approach will be required for those seeking to bolster performance."

Active investing — picking stocks, in other words — is needed to draw yield from a market that continues floating higher, says BMO. With an S&P 500 year-end target of 2,350, their sector allocation favors healthcare, financials and consumer discretionary, in that order. Least favored are real estate, utilities, and telecom.