Are U.S. equities in for a sizeable pullback? Some investment veterans have been sounding the alarm, even as the benchmark S&P 500 clinches a record as the longest bull market in history.
Amid the market enthusiasm, there are warnings that tightening global liquidity conditions, and how they impact emerging markets in particular, present a major danger and a potential tipping point for markets. And despite U.S. equities continuing to move at full steam, outperforming the rest of the world, some strategists warn that they will be next.
"When you see a risk in emerging markets rolling over, and you have this concentration of liquidity in the U.S., you know that the next market that is going to give in is the equity market of the United States of America," said Hans Redeker, the global head of foreign exchange strategy at Morgan Stanley.
Speaking to CNBC's "Squawk Box Europe" Thursday, Redeker appeared to have no illusions about the future of U.S. stocks.
"The likelihood that we're getting first a tightening in global liquidity conditions is very high, and this has implications on market places," he said. "I think at one point it is, as well, going to call out the U.S. — the S&P at the moment is I think trading at lofty levels, and its benefiting from this concentration of liquidity, but that cannot last."
He attributed some of this to the pulling away of funds from emerging markets which are struggling under the weight of a strengthened dollar and higher U.S. interest rates. The economic activity and investment that emerging markets previously enjoyed will cease to take place, he and others have warned. These flows from developing economies are finding a home in the U..S., but Redeker believes the slowdown could also be on its way.
"So what you have is that the economy, globally, is slowing down from the fringes and going to the core. And I think that the next big challenge for us is when is it actually going to reach the core?"
US versus emerging markets
Indeed, the divergence in U.S. and emerging market performance has been increasingly stark since February, breaking from the prior narrative of synchronized global growth. The S&P 500 is up 6.2 percent since the start of the year, while the MSCI emerging markets index has fallen by around 9 percent. Major developing economies including India, South Africa and Russia were most recently hit by a sell-off triggered by the Turkish currency crisis, exacerbated by U.S. sanctions on both Turkey and Russia.
And while the S&P's bull run is now a record 3,453 days old, a number of economic forecasters are worried about overvaluation. Leuthold Group's Chief Investment Strategist Jim Paulsen recently pointed out that U.S. stock valuations are now among the top 82 percent of market history in the post-war period.
"When you run out of the ability to improve things that'll help the market," Paulsen told CNBC in a prior interview, "you've got a market that is up against its upper bounds."
Combine that with the fact that from October onwards, the Federal Reserve is set to withdraw $600 billion annually from the market in its march away from historically accommodative monetary policy.
Is America 'special'?
Still, some strategists insist that the U.S. will always outperform its peers, and that to sell American assets at this time is irresponsible. Ian Harnett, chief investment strategist at London-based Absolute Strategy, is one of them.
"The dollar outperforms when everything else is going down, when economic growth is slowing, when liquidity is tightening, the U.S. outperforms," Harnett told CNBC Wednesday. He pointed out how after the tech bubble burst in 2000, for instance, the U.S. market was outperforming its peers within three years.
"The only trade this year has actually been America versus the rest of the world," Harnett said. "So it's very dangerous to get out of the U.S., particularly at the top."
Morgan Stanley's Redeker was in stark disagreement. On the idea that the U.S. is special and would "decouple" from the volatility occurring elsewhere, the strategist was blunt.
"I've done this job for 31 years now and each time I hear the word 'decoupling,' my neck hair stands up," he said. "When you see a risk in emerging markets rolling over, and you have this concentration of liquidity in the U.S., you know that the next market that is going to give in is the equity market of the United States of America."
Cracks in global growth may test America's resilience. In the meantime, market watchers are divided over whether to stay in the game or move into cash.
Peter Boockvar, chief investment advisor at Bleakley Advisory Group, echoed Redeker's warning. "It's hard to think that S&P 500 companies are going to be somehow immune to the slowdown we're clearly seeing in China and the rest of Asia and also throughout Europe and Latin America," he said.
The S&P 500 hit an all-time high Tuesday, trading above the prior intraday record of 2,872.87 it hit on January 26.