Quantitative easing has, through pushing down bond yields, had a "huge impact" on financial markets, triggering a historic search for yield and growth that has sent financial asset prices soaring, he said.

This paradigm has created the extreme world of markets. Core to this new world is the fact that after seven years of economic recovery post the global financial crisis, interest rates in the US have only risen 25 basis points, and with just a 15 per cent probability that the Fed funds rate will reach 1 per cent by the end of next year.

Fixed income assets trade at record valuations, with more than $US10 trillion in global government bonds delivering negative yields.

These falling yields have resulted in investors being prepared to pay ever higher prices, particularly for equities.

According to Mr Oppenheimer, the price-to-earnings ratio of the S&P 500 has expanded 75 per cent since 2011.

Low inflation and quantitative easing, or money printing, along with persistently weak economic growth, has led investors to defensive, low volatility and stable equities in place of traditional market plays such as cyclicals and value stocks. But investors need to be aware that this will not always be the case.

"The wide valuation spreads that have emerged make equities vulnerable to rotations," Mr Oppenheimer said.

"The current price to book value of [consumer staples stocks] in Europe has hit an all-time peak, more than five times that of banks. But it is likely that these rotations are tactical and short-lived."

Joshua Jones, portfolio manager at Robeco Boston Partners Global Premium Equities Fund, said defensive assets, traditionally seen as low volatility and low risk, now traded at a 30 to 40 per cent premium to the broader market, creating a bubble that has turned these sectors into risky investments.

"People are basically expanding multiples in these stocks to the point where they've collectively become momentum stocks," he said.

The momentum has its basis in the belief that interest rates will remain permanently low and price-to-earnings multiples will remain high. Mr Jones said the downside could be "significant" given the trade off for this belief is a low to mid-single digit return on these assets. As a result the fund is avoiding consumer staples and utilities sectors globally.

While markets have been pushed to extremes, there is little consensus on where they will develop from here. Goldman Sachs has outlined four potential directions: 

New Goldilocks

This scenario is what has driven the market's rally and valuations, where inflation remains low and loose monetary policy remains the stance of major central banks.

While bond yields also stay low, governments come on board through fiscal policy reforms which leads to a rise in expectations for growth. The result is a new bull market, with valuations pushing even higher, and emerging markets outperform their developed peers. 

Reflation

Wage inflation and closing output gaps drive inflation higher than expected, while fiscal policy helps lift economies, commodity prices rise, or a combination of both.

Higher interest rates in the US and higher bond yields result from this, which benefits cyclical stocks, but defensive and consumer staple stocks suffer the most.

Developed markets outperform emerging markets, and Europe and Japan outperform the US. 

'Fat & Flat'

This is the most likely scenario, according to Mr Oppenheimer and a theme that has been playing out over the past year.

While equities may not move much higher on valuations, they are likely to benefit from modest profit growth and attractive yield, he said.

Equities remain the least worst asset class, with stable, defensive and low volatility companies outperforming. 

Stagflation

In this bearish scenario, growth fails to lift in line with expectations because fiscal policy either fails or is absent, profit growth is weak but inflation rises due to higher wages on a tightening labour market, pushing bond yields higher.

"Of course, even in this scenario, we are not envisaging a return to '70s-style stagflation with double-digit inflation rates," Mr Oppenheimer said.

However, given how low expectations are, even a lift to 3 or 4 per cent would come as a shock. In the absence of real growth, defensives and consumer staples outperform cyclicals.