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Stock valuations are stretched, so here's what you should do, strategist says

  • Earnings have helped push stocks higher, but so has excitement over President Donald Trump's pro-growth agenda — and that's led to valuations that are now stretched, Invesco global strategist Kristina Hooper told CNBC.
  • Hooper's advice for investors is to stay protected.
  • CastleArk's Jerry Castellini agrees with David Tepper that the market is nowhere near overheated.

Earnings have helped push stocks higher, but so has excitement over President Donald Trump's pro-growth agenda — and that's led to valuations that are now stretched, Invesco global strategist Kristina Hooper told CNBC on Tuesday.

"Stocks are priced for legislative perfection and we haven't seen that," she said in an interview with "Power Lunch."

On Tuesday, the latest Bank of America Merrill Lynch Fund Manager Survey reported a historic high for the belief that the market is overvalued. That prompted hedge-fund billionaire David Tepper to tell CNBC on Tuesday, "You're nowhere near an overheated market."

Jerry Castellini, president and chief investment officer at CastleArk Management, believes Tepper is "absolutely spot on."

"If you take the value of equities today relative to inflation, they're at 40- and 70-year lows. The '50s and the '80s were the last time stocks were this cheap relative to inflation, and we don't see inflation ticking up anytime soon," he told "Power Lunch."

He sees great cyclical themes in housing, energy and industrials.

Hooper's advice for investors is to stay protected.

"There are certainly conditions that are very supportive of stocks, but we want to protect on the downside. Emphasize dividends, emphasize broad diversification," she said.

That includes having exposure to international stocks and fixed income.

"It's not just about geopolitical risk. It's about monetary policy risk, with the potential for a new Fed chair in the offing, as well as balance-sheet normalization," Hooper noted.

The Federal Reserve has said it will begin to shrink its $4.5 trillion balance sheet relatively soon. Meanwhile, Janet Yellen's term as Fed chair is set to expire in January 2018.

— CNBC's Jeff Cox contributed to this report.