"Our problem is that the S&P is up this year about 25% on earnings that are up 3%. So we've got a market that is rising because of P/E expansion," 21-year GMO veteran Ben Inker tells Barron's (one recalls a similar warning from Guggenheim back in August).
Inker argues that because P/E multiples are still expanding at a time when profit margins are "already as good as we've ever seen," the prospects for upside surprises to profit growth look "pretty dim" going forward.
As for bonds, Inker characterizes the return on U.S. government debt as "horrible" and says corporate debt "is riskier than people are making it out to be, particularly the very low-rated stuff."
Inker's picks for the current environment: TIPS, "high-quality" U.S. companies, and emerging-market stocks where reasonable valuations leave room for some upside.