Although the market is close to an all-time high, plenty of companies are trading well below their peaks providing buying opportunities for investors, said Scott Clemons, chief investment strategist at Brown Brothers Harriman.
"We are finding opportunities in select sectors like beaten-down energy names and selective consumer staples with the exception of high dividend stocks which generally have run their course," said Clemons.
In Clemons' view, equity market valuations are high and earnings growth is weak, despite the recent slew of companies beating Wall Street profit estimates. This does not necessarily spell the end of a bull market, according to Clemons, but it does imply that markets are more likely to overreact to external developments. Investors should be prepared for more price volatility in his view.
"The bull market is at a transition point where we need to see a rebound in earnings growth to fuel the next leg, but we are not really seeing it yet. Third quarter growth has been positive but not overwhelming," said Clemons.
Clemons said valuations outside of the United States are more attractive, particularly in emerging markets. He said the gap between U.S. and EM valuations are now as wide as they have been since the summer of 1998.
Regarding fixed income, Clemons said the low interest rate environment is forcing investors to make tradeoffs.
"We have, for the most part, opted to keep fixed income high quality and short duration, making it a source of liquidity and stability rather than yield," said Clemons. "This is likely to remain the case as the Fed takes its time restoring more normal interest rate policy."
The most important economic indicator to watch for the next 12 to 18 months is wage growth, according to Clemons. Higher wages boost economic activity with personal consumption being 70% of GDP. They also influence the pace of monetary policy, and are likely to boost corporate earnings as wage hikes get spent rather than saved.