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Many on Wall Street are starting to warn about what could be an overheated stock market. 

Stocks Are Flying High in 2019

The S&P 500 is up 12.31% year-to-date in a year that is projected to see companies on the index post a blended earnings growth rate of 4.5%, with the first quarter expected to see an earnings contraction of 2.7%, according to FactSet data. The average forward price-to-earnings on the S&P 500 is 16.2, above the long-term historical average of 15.4. 

The rally has been led by tech stocks -- much like in 2017 and the first three quarters of 2018 -- which have pushed the Nasdaq to a 14.4% gain for the year. Global economic growth forecasts have been consistently revised downward over the past several months, which is usually then followed by earnings growth revisions. As the market has rallied of late on strong signs that the U.S. and China trade spat will at least abate, many top advisers and analysts on Wall Street are warning. 

What Wall Street Is Saying

"Near-term stocks are quite overbought and a pullback could be warranted," wrote LPL Financial's Senior Market Strategist Ryan Detrick, a U.S. stock market bull, in a note out to clients. 

As growth stocks have run-up in 2019, Glenmede's Chief Investment Officer wrote, "The disparity between value/growth is hitting levels that may warrant portfolio tilts toward value."

A few weeks ago, Albert Brenner, Director of Asset Allocation Strategy at People's United Advisors told TheStreet he'll be cautious on cyclical sectors given the market's run.

  • See what affect the emergence of 'headline risk' can have on the market in the near-term here.

As for tech, "Our strategy team expects further declines in earnings forecasts, along with heightened volatility," wrote a team of Morgan Stanley analysts, who collectively cover the technology and telecommunications sector. The Morgan Stanley analysts recommend an underweight position in tech, as "relative valuations and growth expectations can fall further in a crowded sector that is likely to experience a worse-than-average earnings disappointment given the fact that we just experienced a two-year boom in tech capex {capital expenditures}." Semiconductors have been particularly hot, as the iShares PHLX Semiconductor ETF (SOXX - Get Report) is up 20% this year. 

Some Stocks to Consider

Morgan Stanley says that zeroing in select tech stocks -- which seems aligned with Wall Street's recent cry for the need for active fund management -- would be wise. 

The bank has a $64 price target on Intel Corp. (INTC - Get Report) , representing 20% upside from its current level. The enterprise value to sales ratio is too low against its peers, while the company has an opportunity to improve capital allocation and boost free cash flow, the analysts wrote. 

Arista Networks Inc. (ANET - Get Report) is a little-known software networking company, actually worth $21 billion by market cap, which Morgan Stanley has in its top picks. "Arista's secular growth opportunity with key hyperscale customers remains intact, and we think the magnitude of upside to estimates could become even greater 2H19/2020," the note said. Alphabet Inc.'s (GOOGL - Get Report) Google just announced it will invest $13 billion into new data centers, a development that RBC Capital Markets analyst Mitch Steves said in mid February could make Arista a Google hyperscale supplier

Amphenol Corporation (APH - Get Report) could offer investors defensive exposure during what seems to be a cyclical downturn in semiconductor equipment. "APH offers an attractive combination of defensive (strong operator and business model at a time of downside risks in the tech supply chain) and offensive (incremental contribution from its successful M&A program) attributes," the Morgan Stanley analysts wrote. 

Moving away from chip stocks, the bank likes AT&T Inc. (T - Get Report) , as the global shift to 5G should benefit the cellular service provider. Plus, "the current attractive valuation provides support." AT&T's forward earnings multiple of 8.55 is part of that valuation, and Morgan Stanley has a $37 price target, representing 19% upside. 

Microsoft Corp. (MSFT - Get Report) could have "improving margins and underpriced earnings growth," the note said. WedBush Securities just added the stock to its 'Best Ideas' list. Morgan Stanley's $140 price target represents 26% upside. 

Investing Strategies for 2019

Thus, many on Wall Street are saying active management is a better move over being in ETFs. "We like active management at this point in the economic and capital market cycles, particularly here in the United States as we're in the tenth year of an economic expansion in the bull market," said Brenner. 

TD Ameritrade's Trading Strategy Manager Shawn Cruz says now is the time to buy put options, as volatility may soon return, especially as the seemingly improving trade situation between the U.S. and China unravels rather slowly.  

For particularly defensive investors, E*Trade's head of investment strategy, suggests certain dividend stocks, many of which provide premium yields against the 10-year treasury rate of 2.6%.