PNC Financial's Amanda Agati is warning investors the market is in a fragile place on the eve of earnings season because of high valuations and serious risks associated with the Covid pandemic.
"I'm not necessarily convinced that Q1 earnings season is really going to be all that wonderful," the firm's chief investment officer told CNBC's "Trading Nation" on Monday. "The market has absolutely set a very high bar."
According to Refinitiv, the S&P 500 should have the strongest earnings growth since 2018's third quarter. It projects Q1 earnings growth will surge 24% from a year earlier.
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"We've seen a lot of those value-oriented stocks, a lot of the lower-quality names, rally pretty hard in anticipation of earnings season. While we think the high bar is likely to be achievable, we're not really convinced we're going to see that outsized beat rate that we've seen over the last couple of quarters," Agati said. "That's really what we need at these valuation levels to keep this market rally fueled."
Agati, who has $170 billion in assets under management, believes most of the good news is priced into the market.
"We really think that Q1 earnings season, unfortunately, may be a little bit more of a 'buy the rumor, sell the news' here until we can get a really meaningful and broad-based acceleration in the underlying fundamentals," said Agati.
But she believes that will be problematic due to the pandemic.
"Covid is very much in the driver's seat even with all the progress that we've seen so far this year in terms of reopening and slow but steadier progress around vaccine distribution and deployment," Agati said. "The reality is we are still facing pretty significant Covid waves across many parts of the globe."
Agati also highlights fresh risks surrounding the long-term effectiveness of the coronavirus vaccines.
"We're starting to see data coming out of medical journals here recently that we may need to start thinking about a booster shot after six months time of being vaccinated," she added. "You think about when vaccinations started in December. It's starting to come back into the narrative right around midyear."
Due to the unsettled backdrop and stretched valuations in U.S. stocks, Agati is urging investors to look abroad for the most upside.
"Without a doubt, we continue to believe that emerging markets is the brightest star in the equity asset class universe," Agati said. "Emerging markets has the strongest earnings growth backdrop not only for this year, but also in 2022 as well. ... They did not fall anywhere near as far as the rest of the developed world in 2020."
CNBC's Robert Hum contributed to this report.