With "too much hope" being priced into the market, investors essentially have to "de-risk," bond guru Bill Gross told CNBC on Thursday.
"In terms of bonds, instead of extending duration you hunker down and you take low duration, short duration vehicles that basically don't return as much," the Janus portfolio manager said in an interview with "Power Lunch."
And with stocks, as long as they are pricing in President Donald Trump's goal of 3 percent economic growth, investors should reduce their holdings, he added.
"It becomes a question of reducing risk and reducing return expectations as opposed to anything else."
Investors optimistic about Trump's promises of tax cuts, deregulation and fiscal spending sent the stock market higher after the election.
In Gross' latest investment outlook he warned that a global slowdown in productivity as a result of the financial crisis will make it impossible for Trump to get economic growth back above 3 percent and will reveal financial markets are overvalued.
"Equity markets are priced for too much hope, high-yield bond markets for too much growth, and all asset prices elevated to artificial levels that only a model driven, historically biased investor would believe could lead to returns resembling the past six years, or the decades predating Lehman," he wrote. "High rates of growth, and the productivity that drives it, are likely distant memories from a bygone era."
— CNBC's John Melloy contributed to this report.