Merrill Lynch & Co. , the No. 1 investment firm for individual investors, on Monday cut its recommended asset allocation for stocks on the first trading day since Fed boss Alan Greenspan warned that corporate earnings will not grow as fast as investors believe.

"We have commented that there is a thin line between a liquidity-driven market that anticipates improving fundamentals and a bubble," Merrill's Chief U.S. Strategist Richard Bernstein said in a research note.

"The equity market may have stepped over that line."

Federal Reserve Chairman Alan Greenspan's comments on Friday indicating that the current cycle of interest rate cuts is not yet over provides "additional evidence to support (the) contention that profits will be weaker for longer than investors expect," Bernstein said.

Merrill's new allocation recommends a portfolio with 50 percent in stocks, 30 percent in bonds, and 20 percent in cash, compared with 60 percent stocks, 20 percent bonds, and 20 percent cash before.

Equity valuations in the United States "seem extreme," Bernstein said. The price/earnings to growth rate of the Standard & Poor's 500 Index is at its highest level in the 21-year history of Merrill's data, and is higher than the level reached during the 1987 stock market bubble. The trailing price/earnings ratio of the S&P 500 is now the highest it has ever been.

Investors should accord "significantly lower multiples" to U.S. stocks because earnings results have become increasingly opaque as companies shift from generally accepted accounting principles (GAAP) to "pro forma" reporting, Bernstein said. Pro forma results can be tailored to spruce up companies' income statements.

Bernstein's warning is similar to other bearish Wall Street strategists, including J.P. Morgan's Doug Cliggott, who is predicting a 20-percent fall in the S&P 500 to 950 by the end of 2002. At the beginning of the year, Bernstein set a 2002 target of 1,200 for the S&P 500, or five percent above its current level.

Strategists such as Goldman Sachs' Abby Joseph Cohen, Credit Suisse First Boston's Tom Galvin, UBS Warburg's Ed Kerschner, and CIBC World Market's Subodh Kumar are far more optimistic. They expect stocks to finish the year from 14 percent to 37 percent above their current level.

Like Merrill, several banks have recently upped their bond weighting of their model portfolios. Banc of America's Tom McManus increased his bond weighting to 40 percent from 35 percent and Cliggott raised his weighting to 25 percent from 20 percent.

Merrill's allocation for equities is now below its benchmark, or neutral, stance of 60 percent stocks, 30 percent bonds, and 10 percent cash.