Investors should think carefully about whether buying U.S. equities is the right thing to do in the current environment, a strategist has warned.
Speaking to CNBC's "Squawk Box Europe" on Wednesday, Peter Toogood, CIO of financial services business The Embark Group, noted that many fund managers were not excited about the possibilities in U.S. stocks, despite markets showing some signs of recovery from drastic declines in March.
"The U.S., the big daddy, has been expensive and remains expensive," he said.
Financial markets have been on a roller-coaster ride since the coronavirus crisis first took hold. In the U.S., stock markets saw their worst first quarter on record as the new coronavirus became a worldwide pandemic, but shares rallied in April and have been volatile in May as the lifting of lockdowns, economic stimulus and hopes for a Covid-19 treatment remain in focus.
Toogood said that a lot depended on the "tug of war" between government stimulus and fundamentals.
"The fundamentals are going to stink, there is no question the earnings are going to be extremely challenging. And the bridge is the fiscal stimulus."
The U.S. Economy, like the global economy, is expected to take a significant hit from the pandemic, with the IMF predicting gross domestic product (GDP) in the United States will contract by 5.9% this year. In a bid to mitigate the economic impact of the crisis, Congress has approved a historic $3 trillion in government spending.
Toogood said that many fund managers remained invested in U.S. stocks because "why should they know … whether the fiscal stimulus is sufficient size to overwhelm what is an unparalleled crisis in the sense of revenues disappearing, something that has not happened for over 100 years?"
Investors were now attempting to work out whether they would need to dismiss 2021 corporate earnings, as well as this year's, he added.
Government-imposed lockdown measures, coupled with supply and demand shocks from the coronavirus crisis, hit corporate earnings in the first quarter. A slew of U.S. companies, including Lyft, Apple and PepsiCo, have withdrawn their earnings guidance amid the ongoing uncertainty, with only around one in five companies listed on the S&P 500 still providing quarterly guidance.
Now, a number of analysts are warning that earnings could take longer than markets are anticipating to recover from the effects of the pandemic.
"You have to ask yourself the question about why buying U.S. forward here is the right thing to do," Toogood said on Wednesday, noting that price-to-earnings ratios for U.S. equities were at their highest-ever levels.
"If (the coronavirus) comes back, if we have a second go at this, then those multiples aren't the right multiples. If it isn't coming back, the fiscal stimulus creates the bridge, and in fact, we're probably clear. And that's the thing you're wrestling with."
Toogood isn't the only strategist to take a cautious approach to U.S. equities.
JJ Kinahan, chief market strategist at TD Ameritrade, told CNBC last week that markets were trading on optimism instead of reality, warning that the two may collide in mid-June.
Meanwhile, Victoria Fernandez, chief market strategist at Crossmark Global Investments, said on Tuesday that she expected volatility to continue in U.S. equity markets.
Jonathan Pain, author of The Pain Report, told CNBC's "Street Signs Asia" that financial markets had "got ahead of themselves," and urged investors to exercise caution around U.S. equities in particular.