Investors are now pricing in a rosy soft landing scenario for the U.S. economy after years of recession fears, but that has led valuations to soar, making stocks look riskier.

“I am getting increasingly queasy about the fact that the equity market keeps on pricing in a soft landing,” Kelly told Business Insider in a recent interview, warning investors should “dial back risk.” 

Although he also sees a “very nice soft landing path” for the economy with inflation fading and the labor market remaining resilient, stocks may have a valuation problem that makes them vulnerable to a market shock, he explained.

For example, growth stocks have surged nearly 30% year to date, leaving many investors overexposed to these more risky equities, according to Kelly.

Meanwhile, the S&P 500 now trades at more than 24 times earnings, compared to a historical average of around 19. As a result, Kelly recommended investors rebalance their portfolios to include more value stocks, international equities, and alternative investments.

“At the very time when I think logic would dictate that investors take a little bit of risk off the table, they are passively allowing risk to accumulate on the table,” he said, adding “there’s no need to increase risk if you’ve got enough money to do the things that you want to do.”

A mismatch of expectations

Investors may be forecasting a resilient economy, but part of the reason stocks are rising is because they’re also simultaneously expecting aggressive market-juicing interest rate cuts from the Fed.

To be sure, Friday’s blockbuster jobs report prompted Wall Street analysts to scale back rate-cut forecasts. 

But Lisa Shalett, Morgan Stanley Wealth Management’s chief investment officer, said investors are still pricing in rate cuts like those typically seen during recessions. 

During prior soft landings, the Fed has typically cut rates by less than 125 basis points, but investors are currently expecting 200 basis points of rate cuts.

“Something’s gotta give, and both stocks and bonds could be vulnerable if expectations are disappointed,” Shalett warned in a Monday note to clients.

Of course, not every wealth manager is worried about the stock market. James Demmert, chief investment officer at Main Street Research, told Fortune via email that recent jobs numbers showed the economy is “vibrant.”

And if Thursday’s consumer price index report shows inflation is fading, that will confirm substantial rate cuts are coming to help lift corporate profits, he said. Demmert expects the S&P 500 to surge more than 7% to 6,150 by year-end.

“Our message to investors is that we are in the early stages of a business cycle and bull market with the benefits of the AI tailwinds which should result in above-average equity returns going forward,” he said.

Demmert also noted, like Shalett, that investors may still be pricing in too many rate cuts moving forward, but he argued that any mismatch in expectations that causes stocks to fall in the near term should be used as a buying opportunity. 

The CIO warned that there are risks that could derail stocks’ bull run, from harsh AI regulation to geopolitical issues, but he believes investors shouldn’t give up on this market. “We think it’s of utmost importance for investors to embrace this new bull market,” he argued.