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‘Ridiculous’ valuations: Are markets getting ahead of themselves?

This week saw a feat for the geek in us: The solar eclipse was visible in all of North America plus parts of South America, Africa, and Europe, with a thin path of totality running across the U.S., from Oregon to South Carolina.

Protect your eyes and don't look into the sun for too long or you will be blinded – said the common advice.

That warning may not just apply to solar eclipse fans but also to investors getting carried away with current market levels, especially in the U.S.

The first cracks are already starting to appear as a sense of exhaustion seems to be setting in. On Thursday, the Dow posted its biggest one-day fall in three months as concerns over President Donald Trump's agenda grew – the fear is that recent controversies embroiling the White House will make it less likely for Congress to work with the president to pass business-friendly legislation, such as tax or infrastructure reform.

A journalist looks at the Intraday Price Chart showing London's FTSE 100 Index.
Daniel Sorabji | AFP | Getty Images
A journalist looks at the Intraday Price Chart showing London's FTSE 100 Index.

So far though, strong earnings in the U.S. have outweighed any worries over the Trump agenda. That may be about to change though. At least that is according to Julian Howard, head of multi-asset solutions at GAM. He told me on CNBC last week that "earnings have been becoming more unsustainable versus GDP, as earnings have been driven by squeeze on labor, and we did see no wage inflation coming through." Going forward though, he says there is no further way for capital to suppress labor.

Howard is not alone with that view. Roelof Salomons, chief strategist at Kempen Capital Management, went further by telling CNBC last week that "valuations across the board not only look expensive, they are ridiculous. Monetary policy has distorted everything and pushed investors up the risk curve."

While investors may not have much choice in diversifying their portfolio from equities into government bonds as the global tightening trend will depress bond values, now may be the time to reduce your exposure to U.S. equities – and look elsewhere for continued gains.

Maybe surprisingly, even after months of strong performance as investors cheered the new French government and better growth data, analysts are still loving the Europe trade – despite the strong euro.

Jeffrey Sacks, EMEA investment strategist at Citi Private Bank, is one of those analysts. He told CNBC last week that "the EuroStoxx index PE multiple of 19 times is still at a decent discount to U.S. equities, while the European equity yield difference with European fixed income is over 2 percent." He adds that contrary to expectations, European equities aren't a crowded space yet: "Institutional inflows from global equity investors looking to diversify, as well as from multi-asset investors rotating out of expensive fixed income, are in their early stages with ownership levels in European equities still only modest."

Bottom line, whatever you are doing in the U.S., whether it is investing in equities or taking more adventurous trips to track the solar eclipse – enjoy with caution. Watching it from further afar might be healthier.

—Carolin Roth is anchor on CNBC's Street Signs Europe.